A Guide to Contractor Penalties

The title of this blog sounds ominous and it seems as though the government is constantly after contractor’s money. But don’t let the hype put you off. As a contractor your gross earnings are often more than regular employees so you will end up earning more than regular workers it will therefore be worth it, even after tax. There are a few legislations such as the notorious IR35 that the government set up to catch “disguised employees”, but for those who are genuine, hard working contractors, if you’re clued up about the law, you can still hang on to your well-earned money. ICS have written this guide to help you be aware of various penalties, and how to make sure you don’t get caught by them.

Late and Incorrect Self Assessment Tax Returns

Ideally your self assessment tax return should be done before the 31st October, if on paper, or the 31st January, if online and contain details from last tax year (6th April  – 5th April). If you miss the paper deadline then you must submit online. Fines are a fixed penalty of £100 if you submit the form late from 1 day to 3 months. If your late submission surpasses 3 months then penalties increase by £10 a day. If HMRC find errors in your self assessment they can penalise you for varying amounts depending on how the errors are perceived: they are based on whether the mistake was careless, deliberate, or deliberate and concealed. To avoid being fined, ICS can help you complete your self assessment and will guarantee it is submitted on time. See our Services section, to find the right package for you and details of tasks completed on your behalf.

Limited Company VAT

If you are registered with Companies House as a Limited Company, you must pay VAT on a quarterly basis. A VAT return will be sent to you 4 times a year, summarising the amount of VAT your company has paid and if there are any outstanding payments. You must fill in the return and pay the remaining tax one month from the end of the VAT period. If by the due date you have not submitted the VAT return or payment has not reached HM Revenue & Customs, you will be ‘in default’. You will get a 7 day “grace” period in which you can still pay without being penalised. You stay “in default” for 12 months and HMRC send you a “Surcharge Liability Notice” warning that no penalty is due yet, but you must not make any further mistakes in the next 12 months.

This service is incorporated within our Limited Company Service.

Payroll and Late Filing

HMRC are very strict about PAYE payroll processing; the fines can damage your business and also your employee and employer relations. You must make sure that all PAYE reference codes are correct for each employee and that the correct amounts of deductions are paid on time. Penalties can be applied for late or incorrect tax and NIC. If you make one mistake and pay one PAYE amount wrongly or late, you will not incur a fine, as long as it is less than 6 months late. The amount you are fined depends on how many late payments you make, how late they are and the amount that is late.

By using our Umbrella Service, we ensure you are paid the same day funds are received whilst ensuring we deduct the correct amount of PAYE and NI contributions which are then paid over to HMRC.

IR35 Investigations and Penalties

When you sign a contract you must work out whether it falls within or outside IR35. If you think it will be considered within IR35 then you can either negotiate with your potential client, to make the contract more flexible, or you can sign it and accept you will have to pay higher tax. If you are unsure where your contract will lie in relation to IR35 regulations then you would be safer accepting higher tax rates. If you fall within IR35 but pay yourself as if you were outside of the legislation, you may well be investigated by HMRC and will have to pay steep penalties. The penalties differ depending on the level of deliberateness in which the error has occurred. If HMRC deem the contractor to have made a careless, but ignorant mistake then 30% of the due tax must be paid. 70% of due tax must be paid if the  contractor knew they were inside IR35 but didn’t bother to work out how much tax they should pay and 100% of taxes should be paid if the contractor is found to have known their IR35 status but made efforts to conceal it and essentially lied in their self-assessment. If you wish to avoid penalties and want to understand your IR35 status, visit out IR35 advice page.

As part of our Limited Company Service, we offer a free IR35 review for every contract you undertake and we advise you do this to ensure your IR35 status for each contract. It is often a misconception that you can’t work via a limited company if you fall within the legislation but this is incorrect, it simply affects the way you can pay yourself via your Limited Company.

Harsh penalties and fines do exist for contractors who submit late or inaccurate paper work, but they can be avoided if you are organised, honest and aware of where you stand in relation to the relevant legislation.

ICS are here to help ease this pressure by providing a range of contractor services that help to ensure you get your paper work completed on time, in turn minimising your risk of penalties and keep you up to date with all current legislation affecting contractors.