There are two different problems here. Firstly, contractors within the construction industry must submit monthly returns of their payments to and income tax deductions from sub-contractors. Secondly, sub-contractors may benefit from ‘gross status’ whereby the have no tax deducted from payments made to them. For the contractor filing returns, it is vital that the monthly returns are filed on time (e.g. for return to 5 February by 19 February). If the return is late there is a penalty due which starts at £100 for each return which is late. Under current rules this increases by £100 each month until the return is 12 months late making a penalty of potentially £1,200 for each late return! New rules come in from November 2011 which changes the rules but, penalties can still be significant. There are further penalties if the tax which has been deducted is not paid over on time.
There are three things a contractor can do to avoid or minimse these penalties : (1) make sure they have processes in place to ensure that the Returns are filed on time and tax paid over when due and (2) if either a return or payment is made late due to unforeseen circumstances or events outside the contractors control, make sure that an prompt appeal is made that there was a ‘reasonable excuse’ for the delay. (3) if the new rules give a lower penalty, you can ask HMRC to apply these early.
For the sub-contractor with ‘gross status’ it is important that all the sub-contractors tax returns are submitted on time and all tax payments made on time. If the sub-contractor fails to do this they can lose this status and would then have 20% income tax deducted from all payments made to them by the contractors for whom they work – a very negative impact on their cashflow. This is a very wide field and includes a company’s Corporation Tax obligations, PAYE/CIS obligations and if a partnership/sole trade the individuals own Self Assessment Tax Returns. Some occasional minor delays can be overlooked, but it is dangerous to rely on this. Again if there are unforeseen circumstances behind the late payment or return, an appeal can be made on the grounds of ‘reasonable excuse’.
If you are a contractor or sub-contractor in the position where returns or payments are late and you think you have reasonable excuse, it is important to properly present your case to HM Revenue & Customs (or on appeal to the Tax Tribunal). The way the facts are presented can be important to whether the penalty is withdrawn or you keep your gross payment status.
