CIS mistakes costing contractors thousands — and how to fix them

This is the most common and most expensive CIS mistake. Before making a first payment to any subcontractor, you are legally required to verify their status with HMRC. Verification tells you which deduction rate to apply.

The rates are not interchangeable. A verified subcontractor who is registered under CIS pays 20% deductions. An unverified subcontractor — or one who cannot be found on the HMRC system — is subject to 30% deductions. That 10% difference is material on any meaningful contract value.

Here is the part most contractors do not know: if you pay a subcontractor at the wrong rate because you did not verify them, you are liable for the difference. Not the subcontractor — you. If you applied 20% when the correct rate was 30%, HMRC pursues the contractor for the shortfall. The subcontractor has already been paid.

Every CIS contractor must submit a monthly return — the CIS300 — to HMRC by the 19th of the month following the payment month. Pay subcontractors in March, file by 19th April. No exceptions, no grace period.

The penalty structure accelerates quickly:

• 1 day late — £100 penalty
• 2 months late — £200 penalty
• 6 months late — £300 or 5% of deductions due (whichever is higher)
• 12 months late — £300 or 5% again, plus potential criminal investigation

These are per return. A contractor who files four returns late in a year is looking at £400 minimum before HMRC looks at anything else. Filing incorrectly — wrong deduction amounts, missing subcontractors, wrong verification numbers — creates a separate exposure.

Every time you make a CIS deduction from a subcontractor payment, you must provide them with a written deduction statement. This is a legal obligation — not optional, not something you do when asked. It goes to the subcontractor for every payment made under CIS.

The statement must show the contractor's name, employer reference, the subcontractor's name and UTR, the payment period, the gross amount, the amount deducted, and the net amount paid.

Subcontractors need these statements to reclaim their deductions through Self Assessment. If you have not been issuing them, your subbies may have been unable to claim back deductions they are entitled to — and you have been in breach of CIS regulations for every month it has happened.

This is the most expensive mistake that nobody talks about. If your business operates as both a contractor — paying subbies — and a subcontractor — getting paid by a main contractor with CIS deducted — you can offset the CIS deducted from your own payments against your monthly PAYE and CIS liability to HMRC.

In plain English: the money HMRC has already taken from you as a subcontractor can reduce what you owe HMRC as an employer. Most businesses in this position never claim it — or claim it incorrectly — and end up overpaying HMRC every month, sometimes for years.

The offset is claimed through the Employer Payment Summary (EPS) — a separate RTI submission to HMRC that must be filed by the 19th of the following month. If you are not filing EPS returns with your CIS suffered figures, you are not claiming the offset.

Paying someone under CIS when they should be on PAYE — or vice versa — creates one of the most serious and expensive HMRC exposures in construction. The distinction matters enormously, and HMRC has become increasingly aggressive in investigating it.

A worker should generally be on PAYE if your business controls how, when, and where they work. A subcontractor under CIS should have genuine independence — their own business, the ability to send a substitute, financial risk in the work. When the reality does not match the paperwork, HMRC calls it disguised employment.

The consequence of getting this wrong is backdated PAYE and National Insurance — typically going back two to six years — plus interest and penalties on top. For a business with ten workers misclassified for three years, this can be a six-figure exposure.

From 6 April 2026, CIS subcontractors earning over £50,000 must submit income and expense updates to HMRC every quarter under Making Tax Digital for Income Tax. This is not optional, not a pilot, and not something that only applies to accountants' clients who have been specifically told about it.

The penalty system is points-based and has no grace period. Miss your first quarterly submission due 5 August 2026 and you receive a penalty point immediately. Four points triggers a £200 financial penalty — automatically, with no warning. Points take 24 months of clean submissions to clear.

The majority of CIS subcontractors above the threshold have not been told this applies to them. Most found out about MTD ITSA from a trade forum or a call from someone like bookd. — not from HMRC, not from their accountant, and certainly not from the government communications around it.