Common CIS Mistakes to Avoid

Key facts

Failing to verify subcontractors before making the first payment is one of the most common CIS mistakes.
Applying the wrong deduction rate (e.g. 30% instead of 20%) causes problems for both parties.
Not filing nil returns when there are no subcontractor payments leads to automatic penalties.
Incorrectly treating employees as subcontractors can result in significant PAYE/NIC liabilities.
Failing to issue payment and deduction statements prevents subcontractors from reclaiming their deductions.

Overview

CIS has numerous compliance requirements for contractors, and getting them wrong can be expensive. This guide covers the most common errors seen in practice, explains why they happen, and provides practical advice for avoiding them.^[1]

Common Contractor Mistakes

1. Not Verifying Subcontractors

Contractors must verify every subcontractor with HMRC before making the first payment under each contract. Failure to verify means:^[1]

You do not know the correct deduction rate
You must apply the 30% unmatched rate by default
If you applied 20% without verifying, you are liable for the 10% shortfall

Best practice: Verify every new subcontractor before the first payment. Re-verify at the start of each tax year. Keep a verification log with the date, the subcontractor’s UTR, and the confirmed deduction rate.

2. Wrong Deduction Rate

Applying the wrong CIS deduction rate is a frequent error. Common scenarios include:

Error	Consequence	How to Avoid
Applied 20% when verification said 30%	Contractor liable for the 10% shortfall to HMRC	Record and follow the verification result exactly
Applied 30% when rate should be 20%	Subcontractor is over-deducted; contractor must refund and correct	Always verify before the first payment
Applied 20% when subcontractor has gross payment status	Subcontractor has unnecessary deductions to reclaim	Verify each tax year — status may change

3. Not Filing Nil Returns

If you have no subcontractor payments in a tax month, you must still file a nil return or notify HMRC that you are inactive. Failure to do so results in an automatic £100 penalty per missed return.^[1]

4. Missing Filing Deadlines

CIS returns must be filed by the 19th of the month following the tax month. Late filing triggers automatic penalties, and multiple late returns compound quickly. Set calendar reminders or use payroll software that prompts you.

5. Incorrect Materials Deductions

Materials that the subcontractor has purchased are excluded from CIS deductions. Common errors include:^[3]

Including materials supplied by the contractor — only materials the subcontractor purchased and provided qualify
Accepting inflated materials claims without evidence — request receipts or invoices
Excluding legitimate materials and over-deducting as a result

6. Not Issuing Payment and Deduction Statements

Contractors must provide a payment and deduction statement to each subcontractor within 14 days of the end of each tax month. Without these statements, subcontractors cannot accurately claim back their deductions on their tax returns.

Common Subcontractor Mistakes

7. Not Registering for CIS

If a subcontractor does not register with HMRC for CIS, they are treated as “unmatched” and the contractor must deduct at 30% instead of 20%. Registering is straightforward and immediately reduces the deduction rate.^[2]

8. Reporting Net Income Instead of Gross

Subcontractors must report their gross construction income (before CIS deductions) as their business turnover on their Self Assessment return. A common mistake is reporting the net amount received, which understates income and results in incorrect CIS deduction claims.

9. Not Keeping Payment and Deduction Statements

Payment and deduction statements are the evidence you need to reclaim CIS deductions. Without them, you cannot prove how much was deducted, and HMRC may query your claim. Request duplicates promptly if any are missing.

10. Claiming CIS Deductions as a Business Expense

CIS deductions are not a business expense — they are advance tax payments. Do not deduct them from your business profits. Instead, enter them in the dedicated CIS deductions box on your Self Assessment return so they are offset against your tax liability.

Tip: Treat CIS deductions like PAYE deductions from employment — they reduce your tax bill, not your business profits. Your profit is calculated before CIS deductions; the deductions are then credited against the resulting tax.

The Employment Status Trap

The single most serious CIS mistake is misclassifying workers. If HMRC determines that a “subcontractor” is actually an employee, the contractor faces:^[3]

PAYE Income Tax arrears (the difference between CIS deductions and PAYE that should have been deducted)
Employer NICs (13.8%) that should have been paid
Employee NICs (8%) that should have been deducted
Interest on all underpaid amounts
Penalties of up to 100% for deliberate misclassification

Key factors HMRC considers include: control over how, when, and where work is done; obligation to provide personal service; mutuality of obligation; provision of equipment; and financial risk.

Prevention Checklist

Verify every subcontractor with HMRC before the first payment
Record verification results and re-verify each tax year
File CIS returns by the 19th of each month (including nil returns)
Issue payment and deduction statements within 14 days
Request evidence for materials claims
Keep all CIS records for at least 6 years
Review employment status before engaging workers under CIS
Pay deductions to HMRC by the 22nd of each month

Frequently Asked Questions

What is the most costly CIS mistake?

Treating workers who should be employees as CIS subcontractors is typically the most costly error. If HMRC reclassifies workers as employees, the contractor becomes liable for the PAYE Income Tax and employer/employee NICs that should have been deducted, plus interest and penalties. This can amount to tens of thousands of pounds.

How do I avoid applying the wrong deduction rate?

Always verify each subcontractor with HMRC before making the first payment. Record the verification result (including the deduction rate and date verified) in your records. Re-verify at the start of each tax year, and always verify if there has been a gap since the last payment. Never assume a rate — always check with HMRC.

What should I do if I discover I have made a CIS mistake?

Correct it as soon as possible. Use an earlier period adjustment (EPA) on your next CIS return for calculation errors. Contact HMRC directly for wrong subcontractor details or previous-year errors. Voluntary disclosure before HMRC finds the error will result in lower penalties.

Can subcontractors make CIS mistakes too?

Yes. Common subcontractor mistakes include not registering for CIS (resulting in 30% deductions instead of 20%), not keeping payment and deduction statements, failing to report CIS income on their Self Assessment return, and trying to claim CIS deductions as a business expense rather than a tax credit.

Sources

What you must do as a CIS contractor — GOV.UK
What you must do as a CIS subcontractor — GOV.UK
CIS: common errors and compliance (CISR82000) — HMRC