What CIS Return Errors Should Contractors Check for Now?
Published 7 November 2027
HMRC is writing to contractors after finding repeated mistakes in monthly Construction Industry Scheme returns for 2025/26. The message is clear: small CIS return errors can turn into tax, interest, penalties and time-consuming correspondence.
The Construction Industry Scheme applies to most construction work in the UK. Contractors who pay subcontractors must usually deduct tax from those payments, report the figures on a monthly CIS return and pay the deductions to HMRC.
HMRC has highlighted three problem areas:
Using the wrong CIS deduction rate
Failing to record materials separately
Entering figures that do not match payroll, invoices or accounting records
None of these issues is especially complex. The risk comes from routine, pressure and poor checks. If CIS returns are prepared in a rush, the wrong rate or wrong figure can slip through unnoticed.
This article explains the three errors HMRC is focusing on, why they happen and what contractors can do before submitting the next return.
Why HMRC is focusing on CIS returns
CIS is designed to collect tax from subcontractor payments in the construction sector. The contractor carries the reporting burden, even though the tax relates to the subcontractor’s income.
That means the contractor must:
Decide whether CIS applies to the work
Verify subcontractors where required
Apply the correct deduction rate
Separate labour from materials where needed
Submit a monthly CIS return
Pay deductions to HMRC
Give subcontractors a payment and deduction statement
A mistake in any one of these steps can cause a mismatch in HMRC’s records. If HMRC thinks a subcontractor was under-deducted, over-deducted or reported incorrectly, it may contact the contractor.
The current HMRC letters appear to focus on contractors who made errors on 2025/26 monthly CIS returns. The letters are a prompt to correct processes before the same mistakes continue across the year.
CIS errors are often record-keeping errors first and tax errors second.
That is why the fix is usually practical. Better verification, clearer invoice breakdowns and a final check before submission can prevent most problems.
The first error is using the wrong CIS deduction rate
The most important figure on a CIS payment is the deduction rate. HMRC has identified contractors using the wrong rate on monthly returns.
CIS deductions are generally made at one of three rates:
Subcontractor status | CIS deduction treatment |
Registered subcontractor | Deduct tax at 20% |
Subcontractor not registered or not verified correctly | Deduct tax at 30% |
Subcontractor with gross payment status | No CIS deduction required |
The contractor should not guess the rate. HMRC’s verification process confirms which deduction rate to use.
When contractors must verify a subcontractor
A contractor must verify a subcontractor before paying them if they have not used that subcontractor before.
There is also a trap for returning subcontractors. If the contractor has used them in the past but has not included them on a CIS return in the current tax year or the previous two tax years, they must be verified again.
For example, a contractor last paid a plasterer three years ago. The plasterer now comes back for a new job. Even if the contractor still has old details on file, they should not rely on the previous rate. They need to verify again before making payment.
HMRC will then confirm whether the contractor should:
Deduct 20%
Deduct 30%
Pay gross because the subcontractor has gross payment status
Why the wrong rate causes problems
Using 20% when HMRC required 30% can leave the contractor exposed for the shortfall. HMRC may ask why the correct verification was not carried out and may pursue the contractor for the under-deducted tax.
Using 30% when the subcontractor should have been paid at 20% can also create problems. The subcontractor may complain, cash flow may be affected and the contractor may need to correct records.
Paying a subcontractor gross without confirmation of gross payment status is especially risky. Gross payment status belongs to the subcontractor, but the contractor must still check that it applies.
How to avoid rate mistakes
The safest approach is to build verification into the onboarding process for every subcontractor.
Before making the first payment, check that you have:
The subcontractor’s full legal name or trading name
Unique taxpayer reference where needed
National Insurance number for sole traders where needed
Company registration number for companies where needed
Partnership details where relevant
HMRC verification result
Verification number where HMRC provides one
Do not rely on what the subcontractor tells you about their rate. They may believe they are registered or have gross payment status, but the contractor needs the HMRC result.
A simple rule helps:
No verification result, no CIS rate decision.
If your accounts team, bookkeeper or payroll provider handles CIS returns, make sure they receive verification results before payment runs are processed.
The second error is failing to record materials separately
HMRC has also found contractors failing to record materials costs shown on subcontractor invoices.
CIS deductions usually apply to the labour element of a payment, not to genuine materials supplied by the subcontractor. That means the invoice should separate materials from labour, and the CIS return should reflect that split.
This is where many errors start. A subcontractor sends one total invoice. The contractor pays it, then deducts CIS from the wrong amount or reports the total without properly recording the materials element.
A simple example
A subcontractor invoices for:
Item | Amount |
Labour | £1,000 |
Materials | £300 |
Total before VAT | £1,300 |
If the subcontractor is verified at 20%, the CIS deduction would usually be calculated on the labour element, not the full £1,300.
That would mean a deduction based on £1,000, not £1,300, assuming the £300 is a genuine materials cost that can be excluded for CIS purposes.
The key point is not just the calculation. The contractor must also record the figures clearly. If the return shows unclear or inconsistent figures, HMRC may query it.
Why materials create confusion
Materials are often handled informally on smaller jobs. A subcontractor may buy fixings, timber, tiles, sand, cement or other items and include them in the invoice.
Problems arise when:
The invoice only shows one total
Materials are described vaguely
Labour and materials are bundled together
The contractor records the payment without keeping the invoice detail
Someone entering the CIS return uses the wrong figure
HMRC expects contractors to take reasonable care. If materials are included, the contractor should be able to show how the CIS deduction was calculated.
What good materials records look like
A good subcontractor invoice should show labour and materials separately. It should not leave the contractor guessing.
A clear invoice might include:
Description of the work done
Labour charge
Materials supplied
VAT where applicable
Total invoice amount
CIS deduction if shown by agreement
Net amount payable
The contractor should then keep a record that matches the invoice and the CIS return.
For internal records, it helps to keep separate columns for:
Gross payment before CIS deduction
Materials
Amount liable to CIS deduction
CIS deducted
Net payment made
That makes it far easier to spot when a deduction has been taken from the wrong amount.
The third error is entering figures incorrectly
The final HMRC concern is more basic, but just as costly. Contractors are entering figures incorrectly on CIS returns.
This can happen even when the deduction rate is right and the invoice is clear. A number may be typed into the wrong box. A payment may be duplicated. A subcontractor may be missed. A figure may be copied from an invoice total instead of payroll or accounting records.
HMRC has pointed to errors that could be avoided by checking returns against source records before submission.
Those source records may include:
Payroll reports
Subcontractor invoices
Accounting software
Bank payment records
CIS deduction statements
Internal job costing records
Common data entry mistakes
The most common manual mistakes include:
Entering the gross invoice total where the labour figure should be used
Recording the wrong materials figure
Using the VAT-inclusive amount when the CIS calculation should not be based on VAT
Posting the payment to the wrong subcontractor
Submitting a return before all payments for the month have been recorded
Including a subcontractor who was paid outside the period
Missing a subcontractor paid near the month end
Rounding figures inconsistently
These errors can be hard to find later because the return may still look plausible. The total may not be obviously wrong unless someone compares it to the underlying records.
The monthly timing risk
CIS returns are monthly. Construction businesses often work under pressure, with site deadlines, supplier payments and subcontractor queries all happening at once.
That increases the risk of treating the CIS return as an admin task rather than a tax filing. Yet HMRC sees the return as a formal declaration.
One useful habit is to close the month before preparing the return. That means checking that all subcontractor invoices and payments for the period have been posted, coded and reviewed.
If a subcontractor has submitted an invoice but has not yet been paid, take care. CIS reporting is linked to payments made, not simply invoices received. Your records should show what was paid and when.
A practical CIS return check before you submit
A short pre-submission check can prevent most of the errors HMRC has identified. It does not need to be complicated. It does need to happen every month.
Use this sequence before filing the CIS return.
Check the subcontractor list
Compare the return against payment records for the month. Every subcontractor paid during the CIS period should be reviewed.
Ask:
Has every paid subcontractor been included if required?
Has anyone been included who was not paid in the period?
Is the name or trading name correct?
Has the payment been posted to the right subcontractor?
This check catches missing and duplicated entries.
Check the verification position
For each subcontractor, confirm that you have a current verification result where required.
Pay special attention to subcontractors returning after a long gap. If they have not appeared on a CIS return in the current or previous two tax years, verify them again.
Keep evidence of the verification result. If HMRC asks later, you need to show why you used the rate you used.
Check the deduction rate
Match the deduction rate on the return to HMRC’s verification result.
This is the point where a second pair of eyes helps. If one person prepares the return, another person can quickly check the rate against the verification record.
Check labour and materials
For every invoice that includes materials, make sure the records split the payment properly.
Check:
Materials are shown separately on the invoice
The materials amount has been entered correctly
CIS has been calculated on the correct amount
The CIS return agrees with the accounting record
If the invoice does not clearly separate labour and materials, ask the subcontractor for a corrected breakdown before finalising the return.
Check the final figures
Before submission, compare the return totals against your accounting or payroll records.
Look for:
Unexpectedly high or low deductions
Subcontractors with no materials where materials were expected
Subcontractors with a different deduction rate from last month
Payments that do not match bank records
Manual adjustments with no explanation
This final review may only take a few minutes, but it can save hours of correspondence with HMRC.
What to do if HMRC has written to you
Do not ignore the letter. HMRC is giving contractors a chance to review and correct their CIS processes.
Start by identifying which return or returns HMRC is referring to. Then compare the submitted figures with your records.
You should check:
The subcontractor’s verification status at the time of payment
The deduction rate used
The invoice breakdown between labour and materials
The amount paid
The amount deducted
The figures submitted on the return
If the return is wrong, correct it as soon as possible. If you are unsure how to correct it, take advice before making changes. A rushed correction can create a second problem.
If the return is right but HMRC’s records suggest otherwise, gather the evidence. Keep copies of invoices, verification results, payment records and deduction statements.
Build a CIS process that stands up to questions
CIS compliance works best when it is built into the payment process, not left until the return is due.
A strong monthly process should include:
Subcontractor verification before first payment
Re-verification where the subcontractor has not been used for the current or previous two tax years
Clear invoice requirements for labour and materials
Consistent coding in accounts software
Monthly checks against payment records
Evidence kept with the return
Review before submission
This is especially important for contractors using multiple systems. If site managers approve work, accounts staff process invoices and an external bookkeeper files the return, information can easily get lost between steps.
Set one clear rule: subcontractor payments cannot be processed unless the CIS treatment is clear.
Take action before the next return
HMRC’s latest letters are a warning that it is reviewing CIS returns and spotting repeat mistakes. The three areas to check now are straightforward:
Are subcontractors verified, and is the correct deduction rate being used?
Are materials recorded separately from labour?
Do the return figures match payroll, invoice and accounting records?
Before submitting your next CIS return, run a full check against those three points. If you have received a letter from HMRC, review the affected returns promptly and get advice if anything is unclear.
Call to action: if your CIS records have grown messy, ask your accountant, bookkeeper or tax adviser to review your next return before it is filed. A short review now can prevent penalties, corrections and HMRC queries later.
This article is for general information only and does not replace professional tax advice for your specific circumstances.
