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Avoid losing out to tax penalties

As the enforcement of the CIS tax regime becomes clear, it is vital that firms get their paperwork spot on, argues Paul Mason

In previous articles, we have warned of the Government’s approach to the new CIS tax regime.

But just how officiously HM Revenue and Customs is enforcing the law following the six month grace period is becoming clear from enquiries received by the Professional Contractors Group advice line.

The focus of its approach across the piece seems to be that penalties should be sought wherever possible.

CIS returns that are a day late are being hit with penalties and, of course, a late return potentially impacts on a contractor’s ability to retain their gross payment status under the current “three strikes and you’re out” regime.

Strict enforcement

This zero tolerance has even applied where the Government has levied penalties even though there has been no loss of tax.

For example, on a particular contract where the subcontractor is registered as being a net payee and the contract includes labour and materials, the contractor is only required to deduct 20 per cent on the labour-only element.

If the split between the two components is incorrect and the materials element is overstated, even though the overall tax position might not have caused a loss to the Exchequer, HMRC can argue that deductions of tax have not been made in accordance with the CIS regulations and therefore the return is incorrect.

Fine without loss

Consequently, the Government can seek a penalty because the incorrect return means that the tax was not paid at the correct time - even when it accepts that there is no interest charge because they accept that no tax has been lost.

The penalty is likely to be set in the region of 25 per cent of the tax ‘due’, and HMRC will argue that they have generously mitigated the penalty - technically it could have been 100 per cent of the tax ‘lost’.

This may seem crazy, but it is not an isolated incident. Sole traders have submitted tax returns which would have resulted in tax refunds.

However, instead of receiving a refund, the returns have triggered enquiries which have identified errors and omissions resulting in additional tax and NIC liabilities, although overall there was no tax loss.

Again HMRC has sought penalties of up to 25 per cent.

Dealing with Revenue and Customs is not unlike watching the England football team: although the taxman is not generating any interest, he does seem to believe he can win on penalties.

Paul Mason is a senior manager at Abbeytax, a partner of the Professional Contractors Group