The Construction Industry Scheme (CIS) is a framework established by HM Revenue and Customs (HMRC) to regulate tax payments within the UK construction sector. Under this scheme, contractors deduct money from a subcontractor’s payments and pass it to HMRC as advance payments towards the subcontractor’s tax and National Insurance contributions. While the CIS aims to streamline tax collection, inaccuracies in tax deductions can occur, leading to financial complications for both contractors and subcontractors.

Importance of Accurate Tax Deductions

Ensuring precise CIS tax deductions and stopping Incorrect CIS Tax Deductions is vital for maintaining compliance with HMRC regulations and safeguarding the financial health of businesses involved. Incorrect deductions can result in:

  • Financial Discrepancies: Overpayments can strain cash flow, while underpayments may lead to unexpected tax liabilities.

  • Penalties and Interest: HMRC may impose penalties and interest on amounts that are underpaid due to incorrect deductions.

  • Administrative Burdens: Rectifying errors requires additional time and resources, diverting attention from core business activities.

Common Scenarios Leading to Incorrect Deductions

Several situations can lead to erroneous CIS tax deductions:

  • Failure to Verify Subcontractor Status: Not confirming a subcontractor’s registration status with HMRC can lead to applying incorrect deduction rates. Contractors are obligated to verify each subcontractor’s status before making payments.

  • Misapplication of Deduction Rates: Applying the standard 20% rate instead of the higher 30% rate (or vice versa) due to misunderstandings or outdated information can cause discrepancies.

  • Errors in Payment Reporting: Mistakes such as reporting incorrect payment amounts or misclassifying expenses can lead to inaccurate deductions.

  • Duplicate Deductions: Deducting tax more than once from the same payment due to clerical errors or miscommunication between departments.

Understanding these common pitfalls is the first step toward ensuring compliance and maintaining the financial integrity of businesses operating under the CIS.

Understanding CIS Deductions

The Construction Industry Scheme (CIS) is mandatory for contractors and subcontractors who operate within the UK’s construction sector. The scheme is designed to ensure that tax liabilities are collected efficiently and on time. To fully grasp how and why errors occur—and more importantly, how to correct them—it’s crucial to understand how CIS deductions work in practice.

Who the CIS Applies To

Contractors are businesses or individuals who pay subcontractors for construction work. This includes not just construction firms, but also property developers and any business that spends over £3 million on construction in a 12-month period.

Subcontractors are those hired by contractors to perform construction work. This includes tradespeople such as electricians, plumbers, and builders who operate as sole traders, partnerships, or limited companies.

Both contractors and subcontractors must register with HMRC under the CIS. However, registration status affects the deduction rate applied to payments made to subcontractors.

Deduction Rates Under CIS

There are three main CIS deduction rates:

  • 0% (Gross Payment Status): Subcontractors who meet certain criteria can apply for gross payment status, meaning contractors pay them in full without making deductions. Criteria include a good compliance record, turnover thresholds, and operating through a UK bank account.

  • 20% (Standard Rate): This rate applies to subcontractors who are registered with the CIS but do not have gross payment status.

  • 30% (Higher Rate): This is applied to subcontractors who are not registered with the CIS or who haven’t been verified with HMRC by the contractor.

Applying the correct rate is essential. For example, if a subcontractor is verified and registered but is mistakenly paid under the 30% rate, they will be over-deducted, affecting their cash flow and requiring additional steps to reclaim the excess.

Examples of Correct vs. Incorrect Deductions

Let’s look at two simple case studies to illustrate:

Correct Deduction Example:

  • John, a verified subcontractor, submits an invoice for £1,000 (labour only, excluding VAT and materials).

  • Contractor verifies John’s 20% deduction status via HMRC.

  • £200 (20%) is deducted and paid to HMRC, and John receives £800.

Incorrect Deduction Example:

  • Jane, a subcontractor with gross payment status, submits an invoice for £1,000.

  • Due to a clerical error, the contractor deducts 20% and pays her only £800.

  • This is a breach of the gross payment terms and will require correction, potentially through amending the CIS return or issuing a corrected payment.

Such errors are more common than many realise, particularly in companies managing multiple subcontractors or using outdated software that fails to integrate with HMRC’s verification tools.

Common CIS Deduction Errors

Despite the structured nature of the Construction Industry Scheme (CIS), errors in deduction are more common than many contractors and subcontractors might expect. Whether due to human oversight, administrative lapses, or system issues, these mistakes can lead to overpayments, underpayments, or even HMRC penalties if not corrected in time.

Below, we outline the most frequent CIS deduction errors, why they happen, and how they can affect your business.

1. Wrong Deduction Rate Used

This is one of the most prevalent issues under the CIS. Contractors are required to verify each subcontractor with HMRC before making payments. HMRC’s response indicates which deduction rate to apply—0%, 20%, or 30%.

Common scenarios include:

  • Failing to verify a subcontractor results in the automatic application of the 30% rate.

  • The subcontractor’s status has changed (e.g., from 20% to gross payment status), but the contractor’s records were not updated.

  • Mistakenly applying 20% instead of the correct 30% for unverified subcontractors.

Impact: Subcontractors face unnecessary cash flow problems due to excessive deductions. Contractors may need to refile CIS returns and issue amended payment statements.

2. Subcontractor Not Verified or Incorrectly Verified

Verification is not a one-time process. Contractors must verify each new subcontractor with HMRC, and they should recheck verification periodically for accuracy.

Why this happens:

  • Contractors assume a subcontractor already registered on a previous project is still verified.

  • Administrative staff skip verification due to time pressure or lack of awareness.

  • Manual errors when entering the subcontractor’s UTR or company name during the verification process.

Impact: Applying the wrong rate (usually 30%) by default, potentially souring contractor-subcontractor relationships and requiring corrective action.

3. Errors in Payment Reporting

Even if the correct rate is applied, contractors may report incorrect payment amounts. These errors often stem from:

  • Including VAT or materials in the deduction calculation (only labour should be subject to CIS deductions).

  • Typographical errors when entering payment values.

  • Software issues that miscalculate or misreport the figures.

Impact: Misreported figures distort the contractor’s CIS returns and subcontractor’s tax record, leading to over or under-deductions and complications during tax reconciliation.

4. Duplicate Deductions

Another frequent mistake is deducting CIS tax more than once on the same invoice or payment.

Causes:

  • Poor internal controls or communication between departments.

  • Entering the same payment twice into the accounting or payroll system.

  • Confusion during month-end reconciliations or when backdating transactions.

Impact: Subcontractors are over-deducted and must go through a time-consuming process to recover funds via self-assessment or direct contact with HMRC.

5. Incorrectly Classifying the Type of Work

Only specific construction-related activities fall under the CIS. Some support services (e.g., architectural design, surveying, or delivering materials) are not subject to deductions. Misclassifying such services can lead to unjustified CIS deductions.

Impact: Unnecessary deductions for work that should be paid in full, leading to disputes and potential compliance issues.

How to Identify an Incorrect Deduction

Timely identification of incorrect CIS deductions is critical for both contractors and subcontractors. Catching errors early allows for swift correction, protects cash flow, and ensures compliance with HMRC regulations. This section outlines practical steps to spot mistakes and prevent them from becoming costly.

Reviewing Monthly CIS Statements

Contractors are required to provide subcontractors with monthly CIS deduction statements. These are vital documents, acting as both a tax summary and a record of compliance.

Subcontractors should check each statement for:

  • The gross amount paid (excluding VAT)

  • The cost of materials (which should not be subject to deduction)

  • The amount of CIS tax deducted

  • The deduction rate applied (20% or 30%)

  • The UTR and contractor’s verification reference (to confirm they were properly verified)

Any discrepancies—such as a deduction on materials or an unexpectedly high tax rate—should raise red flags and be queried immediately.

Contractors should review statements before submission to HMRC to confirm:

  • The right deduction rate has been applied

  • Payments match the internal records

  • Deductions are applied only to labour, not materials or VAT

Reconciling Payments with Invoices

Accurate invoice management is key to catching deduction mistakes.

Subcontractors: When receiving a payment, compare it against the invoice submitted:

  • Was the full invoiced amount paid?

  • Were materials correctly itemised and excluded from the deduction?

  • Was the net payment (after deduction) calculated accurately?

Contractors: Cross-reference subcontractor invoices with the payment system and what’s been declared to HMRC. A mismatch in figures can signal incorrect entries or duplicate deductions.

Tip: Using cloud-based bookkeeping software (e.g. Xero or QuickBooks) integrated with CIS tools makes reconciliation far more efficient and reduces the risk of manual errors.

Subcontractor Records and Payment Summaries

Both contractors and subcontractors should maintain detailed records of every CIS-related transaction for at least three years, in line with HMRC’s requirements.

These records should include:

  • All invoices issued or received

  • Payment receipts and remittance advice

  • Verification results from HMRC

  • Monthly CIS deduction statements

  • Copies of submitted returns

Regularly reviewing these records can help identify:

  • Deductions that don’t align with verified rates

  • Missing payments or underpayments

  • Duplicate entries in return filings

Early Warning Signs of Incorrect Deductions

Here are common signs that indicate a deduction may be incorrect:

  • A subcontractor’s usual rate changes without explanation

  • The net payment received seems unusually low

  • HMRC notifies a subcontractor that their records don’t match submitted returns

  • Frequent queries or complaints from subcontractors about their payment amounts

Steps to Correct a CIS Deduction as a Contractor

When a contractor identifies an incorrect CIS deduction, it’s crucial to take immediate action. Not only does this help maintain trust with subcontractors, but it also ensures your business remains compliant with HMRC regulations. Failing to correct such errors can result in financial penalties, delays in payments, and disputes that damage your reputation.

1. Amending Previous CIS Returns

If an error is discovered after a monthly return has already been submitted to HMRC, the contractor must amend the return through their CIS software or HMRC’s online system.

Steps to follow:

  • Log in to your HMRC CIS account or approved CIS software.

  • Select the month with the incorrect deduction.

  • Edit the relevant subcontractor’s details and correct the figures.

  • Submit the amended return.

  • Keep a copy of both the original and corrected return for your records.

Important: You must make amendments as soon as possible after identifying the error. HMRC allows corrections to be made within the same tax year, but delaying may trigger penalties or compliance checks.

2. Notifying the Subcontractor

Transparency with your subcontractors is essential. If you’ve submitted an incorrect deduction that affects their payment or tax records, inform them promptly and issue a revised CIS payment and deduction statement.

Your communication should include:

  • The nature of the error (e.g. incorrect rate or duplicated deduction)

  • The corrected deduction figures

  • Confirmation that an amended return has been submitted to HMRC

  • A revised CIS statement for their records

This helps the subcontractor adjust their own accounting and ensure accurate tax reporting on their end.

3. Re-issuing Payment Where Necessary

In some cases, correcting an error may involve refunding an over-deducted amount to the subcontractor. This typically occurs when:

  • A subcontractor was entitled to gross payment status but was incorrectly deducted at 20% or 30%

  • The contractor deducted CIS tax on materials or VAT

Important Consideration: If you choose to repay the subcontractor directly, you’ll need to clearly document this in your accounting records and ensure the CIS return reflects the corrected amounts.

Alternatively, the subcontractor may prefer to reclaim the over-deducted tax through their self-assessment return (covered in the next section).

4. Improving Record-Keeping and Processes

To avoid repeat errors, contractors should assess and improve their internal CIS procedures:

  • Implement verification checklists for all new subcontractors.

  • Use CIS-compliant software that automatically applies the correct deduction rates.

  • Train admin staff to understand CIS rules, including what should and shouldn’t be deducted.

  • Schedule regular reviews of CIS returns before submission.

By tightening controls, contractors reduce the likelihood of future errors and build a stronger compliance profile with HMRC.

5. When to Contact HMRC Directly

If an error is complex or cannot be corrected through standard processes—such as when deductions span multiple tax years or were made for the wrong subcontractor—you may need to contact HMRC’s CIS Helpline for guidance. Their team can assist with more complex amendments and ensure the records are aligned across both parties.

HMRC CIS Helpline: 0300 200 3210 (Mon–Fri, 8am–6pm)

Steps to Reclaim Over-Deducted Tax as a Subcontractor

For subcontractors working under the Construction Industry Scheme (CIS), over-deductions can create real cash flow problems and result in an overpayment of tax. Fortunately, there are established processes to reclaim these amounts, whether you’re a sole trader, a limited company, or also operating under PAYE.

1. Understanding How Deductions Are Used

CIS deductions are essentially advance payments toward your income tax and National Insurance contributions (NICs). HMRC tracks these deductions through monthly CIS statements submitted by contractors and reconciles them during your year-end self-assessment or company tax return.

If more tax was deducted than is owed, you’re entitled to a refund or offset against your final tax bill.

2. Reclaiming Overpayments Through Self-Assessment (Sole Traders & Partnerships)

If you operate as a sole trader or in a partnership, overpaid CIS tax is reconciled when you submit your annual Self Assessment tax return.

Steps to reclaim:

  • Keep all monthly CIS statements from contractors as evidence.

  • Include total CIS deductions in the relevant section of your Self Assessment return.

  • HMRC will calculate your final tax liability and compare it against deductions already made.

  • If you’ve overpaid, HMRC will issue a refund or credit the amount towards future tax liabilities.

Top Tip: Submit your tax return as early as possible after 6 April (start of the new tax year) to speed up any refund due.

3. Reclaiming for Limited Companies

If you’re a subcontractor trading as a limited company, you’ll reclaim CIS deductions through your Employer Payment Summary (EPS) via your PAYE account. This process is a bit more complex and is only applicable if your company pays employees (including yourself as a director).

How it works:

  • Your CIS deductions are offset against your company’s PAYE liabilities.

  • File an EPS each month to report the CIS deductions suffered.

  • HMRC will reduce your PAYE bill or refund the difference if deductions exceed what you owe.

Key Points:

  • Ensure you’re submitting an EPS every month deductions are made, even if no employees are paid.

  • Use accurate figures from your CIS deduction statements to avoid processing delays.

If you overpay across the tax year:

  • HMRC allows you to apply for a repayment or carry the credit forward to the next tax year.

4. What If You’re on PAYE and Also Receive CIS Payments?

In rare cases, individuals may be paid under PAYE by one employer and receive CIS payments as a subcontractor elsewhere. HMRC will treat these as separate income streams, and both must be declared on your Self Assessment tax return.

To handle this correctly:

  • Include your PAYE income using your P60 or P45.

  • Enter your CIS income and deductions separately in the self-employment section.

  • HMRC will calculate the total tax due and reconcile it against the deductions made and tax already paid via PAYE.

5. When to Contact HMRC

If:

  • CIS deductions don’t match what’s on your personal tax account,

  • Refunds are delayed more than 40 days,

  • Or you’re unsure about your tax reconciliation,

…you should contact HMRC for help. Having your CIS statements and UTR number ready will speed up the process.

HMRC Self Assessment Helpline: 0300 200 3310

Dealing with HMRC and Avoiding Penalties

CIS-related errors, if left uncorrected, can lead to penalties, delays in tax refunds, or increased scrutiny from HMRC. Whether you’re a contractor correcting a mistake or a subcontractor reclaiming over-deducted tax, it’s essential to understand how HMRC handles these matters—and how to stay compliant to avoid future issues.

How HMRC Handles CIS Disputes and Corrections

HMRC provides mechanisms for both contractors and subcontractors to address errors. While some corrections can be made directly via online submissions, more complex issues may require direct contact with HMRC.

Common scenarios requiring HMRC involvement:

  • A subcontractor’s deductions are not showing in their tax account.

  • Multiple CIS returns were filed incorrectly and affect more than one tax period.

  • A limited company cannot reconcile its PAYE liabilities due to misreported CIS deductions.

  • Disputes over a subcontractor’s status (e.g., gross payment status not being recognised).

In such cases, HMRC may ask for:

  • Copies of invoices and deduction statements.

  • Evidence of payments made.

  • Verification references and UTR numbers.

Resolution typically involves:

  • Reviewing submitted returns and making manual adjustments.

  • Contacting the contractor for clarification or re-submission.

  • Issuing refund decisions based on documentation provided.

Time Limits for CIS Amendments and Refunds

HMRC allows amendments to CIS returns and claims for tax refunds within certain timeframes:

  • CIS Returns: Amendments to submitted CIS returns can typically be made within the same tax year.

  • Self-Assessment: Subcontractors can amend Self Assessment returns up to 12 months after the filing deadline (i.e., by 31 January following the end of the tax year).

  • Refund Claims: Overpayment relief claims can generally be made within four years of the end of the tax year in question.

Tip: The earlier you identify and correct an error, the more likely it is that HMRC will process it without penalty or delay.

Avoiding Common CIS Compliance Pitfalls

To stay on the right side of HMRC and avoid penalties, contractors and subcontractors should:

For Contractors:

  • Verify all subcontractors with HMRC before first payment and retain the verification reference.

  • Use CIS-compliant software that automates calculations and submissions.

  • Submit CIS returns by the 19th of each month following the end of the tax month.

  • Maintain accurate records for at least three years.

  • Respond promptly to queries from HMRC or subcontractors regarding discrepancies.

For Subcontractors:

  • Retain all monthly deduction statements from contractors.

  • Track CIS deductions and compare them to your tax account via HMRC online services.

  • Submit your Self Assessment early to resolve any issues before the deadline.

  • Apply for gross payment status if eligible to reduce administrative burdens and improve cash flow.

HMRC Penalties for CIS Non-Compliance

For Contractors:

  • Late submission of CIS returns: £100 penalty after 1 day, increasing up to £3,000 or more depending on how long it’s overdue.

  • Incorrect or incomplete returns may result in fines or interest on unpaid tax.

For Subcontractors:

  • Failing to report income correctly or missing tax return deadlines can lead to penalties starting at £100, with increases for longer delays or under-declared income.

Being proactive and detail-oriented with your CIS obligations is the best way to avoid fines, delays, and additional administrative burdens.

How LT Accounting Can Help

At LT Accounting, we understand the challenges contractors and subcontractors face when navigating the complexities of the Construction Industry Scheme (CIS). Whether you’re struggling with incorrect deductions, behind on your CIS returns, or simply want to streamline your compliance processes, our dedicated team offers practical, professional support tailored to your needs.

Expert Support with CIS Returns and Adjustments

Filing accurate monthly CIS returns is essential to avoid HMRC penalties and ensure your subcontractors’ tax records are correct. Our experienced accountants can help you:

  • Verify subcontractors and apply the correct deduction rate

  • Prepare and submit monthly CIS returns on time

  • Amend previous returns if errors are found

  • Generate and issue accurate monthly deduction statements

  • Liaise with HMRC to resolve disputes or mismatches

We ensure that every return is compliant, accurate, and submitted by the monthly deadline, so you can focus on running your business without the stress of admin errors.

Assistance with Subcontractor Tax Reclaims

If you’re a subcontractor who has been over-deducted or had payments withheld incorrectly, we can assist with:

  • Reviewing your CIS deduction statements and identifying overpayments

  • Preparing and filing your Self Assessment tax return

  • Reclaiming over-deducted tax swiftly from HMRC

  • Applying for gross payment status (if eligible) to avoid deductions altogether

Our proactive approach ensures you don’t leave money on the table. We’ll work with you to reclaim what you’re owed and optimise your tax position.

Seamless Year-Round Support

CIS doesn’t operate in a vacuum. That’s why we offer integrated support across all related areas of accounting and tax, including:

  • Bookkeeping: Clean, real-time financial data to support CIS reporting.

  • Payroll: Ensuring your team is paid accurately alongside your subcontractor obligations.

  • VAT Returns: Making sure deductions are correctly excluded from VAT calculations.

  • Year-End Accounts: Reconciling CIS records with your full financial picture.

  • Self Assessments: Comprehensive support for sole traders and directors.

  • Management Accounts: Helping you make strategic business decisions with confidence.

Why Choose LT Accounting?

We pride ourselves on being more than just number-crunchers. Our team combines deep industry knowledge with practical experience across the construction sector, providing tailored, responsive service that adapts to your business as it grows.

  • Fully MTD-compliant digital accounting systems

  • Dedicated CIS specialists on hand to support you year-round

  • Transparent pricing with no hidden costs

  • Personalised service for sole traders, limited companies, and partnerships

Whether you’re a small building firm or a large contractor managing multiple subcontractors, we can take the headache out of CIS compliance and give you peace of mind.

Conclusion

Incorrect CIS tax deductions are a common, yet avoidable issue within the UK construction industry. Whether it’s applying the wrong rate, deducting tax from exempt items like materials, or misreporting payments to HMRC, these errors can have serious financial and compliance consequences for both contractors and subcontractors.

Key Takeaways

  • Contractors must verify subcontractors and apply the correct deduction rate—failure to do so can result in excessive deductions or penalties.

  • Subcontractors should review monthly CIS statements and keep accurate records to catch any discrepancies early.

  • Amendments to CIS returns and tax reclaims must be handled promptly to avoid HMRC penalties and to ensure timely refunds.

  • Professional support, such as that provided by LT Accounting, can make the process significantly easier and more reliable.

At LT Accounting, we’re committed to supporting UK contractors and subcontractors through the full lifecycle of CIS—from initial verification to return submission, error correction, and year-end tax compliance. Our team ensures every deduction is accurate, every return is timely, and every client receives personalised advice tailored to their specific needs.

Ready to Fix CIS Deductions or Simplify Your Accounting?

If you’ve experienced issues with incorrect CIS tax deductions or simply want to stay ahead of compliance requirements, we’re here to help.

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