Failure to comply with the regulations, including a failure to give a certificate or produce any document or record as required under the regulations, can result in a penalty charge under TMA 1970, s. 98(1).
Unless a subcontractor is registered for receiving gross payments, the contractor must deduct tax on making payments to him, except in so far as the payment relates to the direct supply of materials by the subcontractor. The amount of tax to be deducted is calculated on the payment due to the subcontractor, net of any VAT charge. The deduction rates for the new scheme are 20 per cent for subcontractors registered with HMRC for payment under deduction and 30 per cent for those not registered.
The contractor must pay the tax deducted to the collector within 14 days from the end of the income tax month. He remains liable to the collector for amounts which he should have deducted and which he failed to deduct, unless he can satisfy the collector that he took reasonable care to comply with the provisions and either:-
- the under-deduction resulted from an error made in good faith; or
- despite having taken reasonable care, he was led to the genuine belief that the payment he made was not one from which the regulations required him to deduct tax.
The contractor is permitted to appeal to the commissioners if the collector refuses to waive his liability.
If the contractor fails to deduct tax when he should have done but the failure was not deliberate, he may ask the inspector to waive the liability, if the subcontractor subsequently accounts for the tax due in respect of the payments.