Expert's guide to contractor penalties – part 1

This is the first article in a four-part guide on the various penalties that you, a limited company contractor, could end up paying the taxman or Companies House, writes Sumit Agarwal, managing director of contractor accountancy firm DNS Associates.

The penalty trio

Broadly-speaking, all penalties aimed at contractors fall into three main categories:

1. Late Filing 
2. Late Payment (plus interest)
3. Those for incorrect returns, which are assessed and for which you will be penalised accordingly as a result of negligence, concealment or mistake. Normally called ‘Schedule 36 Penalties,’ these are levied based on a tax enquiry.

Please note; all the above penalties can be enforced simultaneously. For example, if your tax return is late (- a reported two million people are yet to file) and you pay your tax late and there is an irregularity in your return, then you could end up paying all three kinds of penalties.

Without a doubt I would stress that filing an inaccurate return or committing fraud is the biggest mistake a taxpayer can make, so avoiding doing so is paramount. Personally, I think taxation and tax returns have become so complex that filing accurate returns and accounts requires a professional experience in taxation. Therefore, choosing the right accountant is crucial because they can save you in penalties much more than they will cost you. And bear in mind that a cheaper alternative, such as a ‘book-keeper’ contractor accountant, may cost you more in penalties than you initially save in accountancy fees!

24 hours to go until penalties start to bite

There are numerous returns to be filed with HM Revenue & Customs and Companies House throughout the year. As one major deadline is imminent (on Jan 31^st), here, in part one of this guide, I will cover self assessment late filing and late payment penalties, as well as penalties for filing late accounts with Companies House. Remember that late filing of your company annual return to Companies House does not result in any penalties, but definitely can adversely affect the credit rating of your company.

Before you read on, a final reminder: if you are self-employed, a company director, a trustee or someone receiving foreign income and have not yet filed your online tax return for 2011-12, then please do so now to avoid enriching the taxman. You must also file online before midnight tomorrow if your annual income is in excess of £100,000; if you make significant sums from property, savings and investments (excluding ISAs).

1. Self-Assessment tax return

Anyone who works for themselves, whether a sole trader, owner of a personal service company or someone who earns additional income, whether an employee being paid through PAYE or a director of a company, must file a self assessment tax return by October 31^st for paper submissions, and by January 31^st for online submissions. You must then pay half of any tax due (known as payment on account for the following tax year) by January 31^st and then again by July 31^st. Even if you’ve had a particularly good year, don’t risk the fact that a self-assessment tax return filed six months late could attract a penalty of at least £1,300 even if the tax due is zero.

Penalty for Late Filing – How much you’ll pay

Late filing penalties are separate to late payment penalties. If you are just 24 hours over the deadline you face a minimum penalty of £100, even if no tax is due.

• Three months late: daily penalty of £10 a day, up to a maximum of £900.
• Six months late: further penalties at either 5% of tax due or £300, whichever is greater.
• 12 months late: another penalty, a further 5% of tax due or £300, whichever is greater.
• Note that in serious cases, a penalty of up to 100% of tax due can be charged.

Penalty for Late Payment – How much you’ll pay

Even if you have filed your tax return on time you will still pay a penalty if you fail to pay the tax due on time, the penalties are as follows:

• 30 days late: Initial penalty of 5% of tax unpaid at that date.
• Six months late: A further penalty of 5% of tax that remains unpaid.
• 12 months late: A further penalty of 5% of tax that remains unpaid.

Contractors, remember - until the amount outstanding is paid in full, interest will be charged on all outstanding amounts, including unpaid penalties.

Let’s take a look at a couple of examples of taxpayers falling foul of the self-assessment system:

Example A

• Ray’s tax liability for year ended April 5^th 2012 is £2,000
• He filed his tax return online on March 15^th 2013
• He paid the tax due on August 15^th 2013

So Ray will pay the following penalties:

Late filing penalty: as his return is over a day late but less than 3 months, Ray’s penalty is limited to £100; the daily rate penalty does not apply as his return was filed within three months of the due date.

Late payment penalty: £100, Ray is 30 days late so he must pay the 5% penalty on £2,000 = £100.

Six months late: £100, Ray paid the tax due on August 15^th 2013, more than six months late; so he will pay a further 5% penalty = another £100.

Poor Ray, his total penalties add up to £300!

Contractors, consider – you could be even worse off than Ray if you file your tax return late even if you are not late with the payment! It used to be that if you were late-filing and owed no tax that you wouldn’t pay a fine, but now, whether or not you owe the taxman, a £100 penalty is immediately issued, even if you filed just one minute over the deadline!

Example B

• Kim’s tax liability for year ended April 5^th 2012 is £2,000
• She filed her tax return online on August 15^th 2013
• She paid the tax due on March 15^th 2013

So Kim will pay the following penalties:

Late filing penalty: £100, Kim’s return is more than a day late but less than three months late.

Late filing penalty: £900, her return is three months late, so she pays the maximum penalty of £900.

Late filing penalty: £300, Kim’s return is 6 months late so she pays an additional penalty of £300.

Late payment penalty: £100, she is 30 days late so she pays 5% of £2,000 which is £100.

Kim’s in big trouble - just look at her penalties, they total £1,400!

Contractors, beware - the penalties for unpaid tax are high enough, as shown above, but the penalties for non-filing are HUGE, and will seriously affect your business.

2. Annual Accounts to Companies House

You must file your annual company accounts with Companies House nine months from the end of your accounting period, known as the Accounting Reference Date (ARD), set at incorporation. Failing to file your company accounts or your annual return is a criminal offence and the former will attract a penalty. So, for example, for the period December 1^st 2011 to December 31^st 2012, the ARD is nine months from December 31^st 2012, which means that you must file your accounts with Companies House by September 30^th 2013.

3. Annual Return to Companies House

Filing your annual return with Companies House is different from filing your annual accounts. The annual return is a sort of snapshot of the company management structure, providing details of the directors and shareholders.

Your annual return must be delivered to Companies House every 12 months, normally within 28 days of either the anniversary of the incorporation of the company or on the anniversary of the previous annual return. For example, if the company last filed its annual return on October 5^th 2012, the due date for 2013 will be 28 days from that anniversary: November 2^nd 2013. As mentioned in the introduction, there are no penalties for delay in submission of annual returns but delays jeopardise the credit rating of the company, and non-filing can result in your company being struck off the Companies House register.

Contractors, make no mistake – there are no exceptions to this rule: the ARD is fixed with Companies House at incorporation. Any change to it must be notified in advance. The penalty tariff for late filing of your accounts at Companies House is brutal:

Penalty for Late Filing of Annual Accounts – How much you’ll pay

• Up to 30 days:  £150
• Up to three months: £375
• Up to six months: £750
• In excess of six months: £1,500

Conclusion

When doing business with HMRC or Companies House, why take any chances? Well, the answer is that no shrewd contractor company should risk being even a minute late under this punitive system because, other than the exception of annual returns – which still have negative implications for late-comers, the more you delay, the more you pay.  

Editor's Note: Read the other guides in this series -

Contractors' guide to penalties - ii) PAYE, VAT & P35

Contractors' guide to penalties - iii) CIS, P11D & Corporation Tax

Contractors' guide to penalties – iv) HMRC enquiries