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June 11, 2015

Construction Industry Scheme: Fixed and Discretionary Penalties

Under the Construction Industry Scheme (CIS), contractors are required to file a monthly return to HMRC and deduct money from a subcontrator’s earnings as advance payments on their tax bill.

The penalties for not submitting a CIS return and making payments to HMRC are punitive and failure to meet deadlines can result in a large tax bill.

The first-tier tribunal in Bosher v HMRC ruled that even though the taxpayer did not have a reasonable excuse for failing to file monthly returns, the penalties were disproportionate and excessive and were reduced significantly.

This was later overturned by the upper-tier tribunal who held that the tribunal did not have authority to assess whether a fixed penalty was disproportionate, and could only overturn a penalty on the basis that it was incorrect.

This was applied in the recent case of CJS Eastern Ltd v HMRC where it was held that fixed penalties issued by HMRC were correct and therefore could not be reduced, however the tribunal did have the power to reduce the discretionary penalties to nil on the basis of disproportionality.


  • CJS Eastern Ltd (CJS) had for many years engaged the services of a number of subcontractors
  • CJS entered into a contract with a company named Hudson which claimed to take responsibility for CIS payments and administration in relation to CJS’ subcontractors.
  • The owner of CJS, Mr Sanders, misunderstood Hudson’s services and believed that he was relieved from all CIS liability.
  • However, CJS were required to file CIS returns and deduct payments in relation to Hudson’s engagement.
  • CJS Eastern Ltd were charged the following penalties:
    1) Fixed penalties, each of £100, for failure to submit CIS returns. These totalled £28,500.
    2) Discretionary penalties totalling £52,500 in relation to the CIS failures which had lasted for more than 12 months

The Case

Mr Sanders argued that he had merely misunderstood the terms of Hudson’s contract and that there was no intention not to comply. Before entering into the contract with Hudson, the company had an unblemished record for dealing with CIS.

He stated that he had a genuine belief that CJS was meeting its CIS compliance obligations and that Hudson had represented itself as an expert firm which would enable him to ‘say goodbye to [his] CIS liability’. It was on this basis that he had a reasonable excuse for failing to make payment and complete returns.

Mr Sanders also argued that the penalty was disproportionate and excessive. The unpaid CIS amount was less than £15,000 and was paid to HMRC immediately after he had been informed of his mistake.

Furthermore, CJS was a very small business with less than 10 employees, and in the company’s most profitable year, they made £95,000, meaning that the £81,000 penalty was over 85% of the company’s annual profit.

In contrast, HMRC argued that it was not reasonable of Mr Sanders to have thought that the CIS liability could simply disappear. It was noted that Mr Sanders failed to consult his accountants, solicitors or HMRC prior to signing the contract. If he had, he would have learned that the contract did not include a promise by Hudson to pay over CIS to HMRC or make the monthly returns.

The tribunal agreed with HMRC and held that although Mr Sanders genuinely and honestly believed that the CIS liability had been removed and he had relied on Hudson, a reasonable person would have checked with a lawyer or an accountant to make sure he had properly understood the terms of the contract.

On this basis, the fixed penalties were not incorrect and therefore CJS were required to pay these penalties.

However, the tribunal was able to reduce the 13 month discretionary penalties to nil as it was deemed that they were excessive and disproportionate based on the facts of the case.

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