Contractors can suffer from a wide range of penalties imposed by HMRC if they fail to deliver tax paperwork on time or supply incorrect information. But, according to James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP, contractors can take simple steps to ensure they don’t get fined.
“There are three main reasons that contractors receive penalty notices from HMRC,” he says: “They register late, submit statutory information late or file paperwork with incorrect or inaccurate information.”
And in Abbott’s experience, it is the personal Self Assessment tax return and Corporation Tax return that generate the most problems for contractors, although contractors also fall foul of rules relating to VAT and Pay As You Earn (PAYE) schemes.
Tax penalties and pitfalls for personal Self Assessment tax returns
Key facts for late Self Assessment tax returns:
- File by 31 October (paper) or 31 January (online) after the tax year
- Late filing between 1 day and 3 months incurs a £100 fine
- Fine increases by £10 per day after 3 months
- A fine can be avoided if there is a reasonable excuse, such as a family bereavement close to the deadline.
Key facts for incorrect Self Assessment tax returns:
- Penalties are based on whether the mistake was careless, deliberate, or deliberate and concealed
- Penalties are further stratified according to whether HMRC spots the mistake, or whether the contractor finds a mistake and voluntarily discloses it.
Abbott says: “The most common mistakes are when contractors leave out bank or other savings interest or, for new contractors, when a termination payment such as a redundancy has not been included. HMRC has statutory powers to request data from banks and will match interest payments against tax returns and follow up any discrepancies.”
Tax penalties and pitfalls for Corporation Tax returns
Key facts for late Corporation Tax returns:
Common corporation tax pitfalls are incorrectly recognising income in an incorrect period, errors in adding back expenses and calculating capital allowances
James Abbott, Abbott Moore LLP
- Tax returns should be filed within 12 months of a contractor limited company’s accounting period (ie, the end of its financial year)
- Late filing up to 3 months incurs a £100 fine, and then another £100 fine if more than 3 months late
- Contractors filing late Corporation Tax returns three years running face a £500 fine the next time it is 3 months late, and another £500 fine after 3 months
- Further penalties based on tax rather than fines will kick in if the return is more than 6 months late
- Under the Business Record Checks (BRC) initiative, a contractor’s business records must be of a standard so that they are capable of forming the basis of an accurate return. If HMRC deems they are not, it can issue fines of up to £3,000.
Key facts for incorrect Corporation Tax returns:
- Company profits that have been allocated to the wrong financial year, and should have been shown on the previous year’s return, will incur a penalty of 5% of the incorrect amount
- Penalties for incorrect tax returns vary from 0 - 100% and are based on whether the mistake was careless, deliberate, or deliberate and concealed
- Penalties are further increased according to whether HMRC spots the mistake, or whether the contractor spots a mistake and voluntarily discloses it.
Abbott says: “Common corporation tax pitfalls are incorrectly recognising income in an incorrect period, errors in adding back expenses and calculating capital allowances. For example, a contractor may complete a contract in March at the end of the tax year but not invoice or get paid until April. In most circumstances this income must still be recognised in March because that was when the work was completed.”
General advice on dealing with penalties
Abbott advises contractors consider the following key facts about penalties:
- HMRC can suspend penalties if the mistake was careless rather than deliberate. A contractor can negotiate a reduction on the basis that they promise, and keep to the promise, that they won’t commit the error again
- Penalties are not charged for innocent mistakes when the contractor has not been careless. Contractors who think they have made a genuine mistake should put their case to HMRC
- Contractors are responsible for submitting their tax returns. Blaming an advisor is not automatically an excuse
- Penalties and fines are not tax deductible
- Contractors, or more often their accountants, are responsible for proactively negotiating with HMRC when there is a penalty range
- If they spot an error or realise incorrect information has been submitted, contractors should advise HMRC immediately to minimise any penalty. If HMRC spot it first, the penalty will be higher
- Contractors making repeated errors and regularly filing forms late may not be concerned about the hundreds of pounds it is costing them. However, what this does is increase their company’s risk profile, making it a high profile target for an HMRC investigation.
“Most contractor accountants will ensure that their contractor clients comply right from the start by making it clear what is expected of them, what information is required and when by,” says Abbott. “So, contractors wishing to avoid penalties should do what their accountants ask of them!”