What Are the Common CIS Mistakes Small Contractors Make

At Towerstone Accountants we provide specialist CIS accountancy services for contractors, subcontractors, and construction businesses across the UK. We created this webpage for people working in construction who want clear guidance on CIS deductions, refunds, verification, and monthly return responsibilities, without jargon. Our aim is to help you stay compliant with HMRC, avoid penalties, and keep your cash flow and records under control.

I have worked with small contractors for many years and if there is one thing I can say with confidence it is this, most CIS problems are not caused by deliberate non compliance, they are caused by small misunderstandings that compound over time. CIS is not conceptually difficult, but it is procedural, deadline driven, and unforgiving when things are missed or assumed.

Small contractors are particularly exposed because CIS often sits alongside everything else they are juggling, quoting for work, managing cash flow, paying subcontractors, running payroll, and trying to grow the business. When CIS is treated as an afterthought it quickly becomes a source of penalties, disputes, and stress.

In this article I want to walk through the most common CIS mistakes I see small contractors make, explain why they happen, what the consequences can be, and how they can be avoided with relatively simple systems. This is based on real cases I deal with regularly, not theory.

Assuming CIS only applies to large construction businesses

One of the earliest mistakes small contractors make is assuming CIS is something only big firms need to worry about. I often hear phrases like we are only small or we only use one or two subcontractors so CIS will not apply.

In reality CIS applies based on the nature of the work, not the size of the business. If you are paying subcontractors for construction work as part of your business activities you are very likely a contractor for CIS purposes, even if construction is not your main trade.

This misunderstanding often leads to months or even years of unreported CIS activity which HMRC can identify later through data matching.

Failing to register as a CIS contractor on time

Closely linked to the first mistake is failing to register as a CIS contractor before paying subcontractors. Some small contractors start paying subcontractors informally and plan to sort CIS later once the business is more established.

This is risky. CIS obligations begin as soon as you start making payments to subcontractors for construction work. Registering late does not remove the requirement to report historic payments and deductions.

I regularly help contractors backdate CIS registrations and file missed returns, but it is far more painful than registering correctly from the start.

Not verifying subcontractors before paying them

Verification is one of the most critical steps in CIS and also one of the most commonly missed.

Many small contractors rely on subcontractors telling them they are registered or what deduction rate applies. Others assume that because a subcontractor has worked elsewhere they must already be set up correctly.

HMRC does not accept this. If you pay a subcontractor without verifying them you are exposed to under deductions and penalties.

Verification must be done before the first payment, not afterwards, and it must be done using HMRC’s system rather than informal assurances.

Using the wrong UTR or mixing up personal and company details

This is a very common technical error. Contractors are often given a UTR that belongs to the individual when they are paying a limited company, or vice versa.

HMRC verification is very specific. If you are paying a limited company you must verify the company using the company UTR and company name exactly as registered. Using the director’s personal UTR will lead to failed verification or incorrect deduction rates.

These errors then flow into CIS returns and cause problems for both parties later.

Applying the wrong CIS deduction rate

Once verification is done HMRC confirms the deduction rate that must be applied. Despite this I still see small contractors override the result because they feel uncomfortable deducting 30 percent or because the subcontractor insists it is wrong.

This is understandable from a human point of view but it is a mistake from a compliance perspective. The contractor must apply the rate HMRC confirms, even if it causes tension.

If the rate is wrong the subcontractor must resolve it with HMRC, not the contractor.

Applying a lower rate than required exposes the contractor to HMRC recovering the shortfall from them.

Deducting CIS from the wrong part of the invoice

Another extremely common mistake is deducting CIS from the full invoice amount rather than just the labour element.

CIS should only be applied to labour costs, not materials, not VAT, and not certain reimbursed expenses. Many small contractors deduct CIS from everything because it feels simpler or because invoices are not clearly broken down.

This can lead to significant over deduction and disputes with subcontractors.

The correct approach is to ensure invoices clearly separate labour and materials and apply CIS only to the labour element.

Forgetting to submit monthly CIS returns

CIS returns must be submitted monthly, even if no subcontractors were paid in that month.

Small contractors often assume that if no payments were made there is nothing to report. In most cases a nil return is still required.

Missing returns trigger automatic penalties, often starting at £100 per month and increasing the longer the return is outstanding.

This is one of the most common reasons I see contractors receiving CIS penalty letters unexpectedly.

Assuming CIS is dealt with through accounts or Self Assessment

Another widespread misunderstanding is believing that CIS is dealt with when the accounts or tax return are prepared.

CIS operates independently of annual accounts and Self Assessment. It is a monthly reporting obligation and cannot be corrected or substituted through year end filings.

I regularly see contractors who think their accountant will sort CIS at the end of the year, only to discover multiple missed returns and penalties.

CIS must be managed in real time.

Poor record keeping for CIS payments and deductions

Small contractors often rely on memory or bank statements alone to track payments to subcontractors. This becomes a problem when preparing CIS returns or responding to HMRC queries.

HMRC expects clear records of

• Payments made to subcontractors

• Labour and materials breakdowns

• CIS deductions

• Verification results

• CIS deduction statements issued

Without these records it becomes difficult to correct errors or defend positions if questioned.

Failing to issue CIS deduction statements to subcontractors

Contractors are required to provide subcontractors with CIS deduction statements showing what was paid and what was deducted.

Small contractors sometimes skip this step, especially where relationships are informal. This causes problems later when subcontractors try to complete their tax returns and cannot evidence deductions.

It also increases the likelihood of disputes and complaints.

Issuing deduction statements is not optional and should be part of the monthly process.

Missing CIS payments to HMRC or paying late

In addition to filing returns contractors must pay CIS deductions to HMRC by the monthly deadline.

Cash flow pressure can lead small contractors to delay payment, particularly if they are waiting to be paid themselves. Unfortunately HMRC does not accept this as a reason for late payment.

Late payments can attract interest and penalties and repeated issues can flag the business for closer scrutiny.

Confusing CIS with employment status

Some small contractors incorrectly treat workers as subcontractors under CIS when in reality they should be employees under PAYE.

This is not strictly a CIS error but it often surfaces through CIS compliance checks.

HMRC looks closely at employment status and using CIS incorrectly to avoid PAYE obligations can lead to significant liabilities.

Understanding the difference between genuine subcontracting and employment is essential.

Not understanding gross payment status properly

Gross payment status is often misunderstood. Some contractors assume that if a subcontractor has gross status there is no need to verify them or report payments.

This is incorrect. Gross payment status only affects the deduction rate, it does not remove CIS obligations.

Gross paid subcontractors must still be verified and reported on CIS returns.

Ignoring CIS letters and HMRC communications

Small contractors sometimes ignore CIS letters from HMRC because they are busy or assume the issue will resolve itself.

This rarely ends well. HMRC letters usually relate to missing returns, penalties, or discrepancies that will escalate if ignored.

Engaging early often allows issues to be resolved quickly and penalties to be reduced or cancelled.

Trying to fix CIS errors in the wrong way

I often see contractors try to fix CIS mistakes by adjusting future returns informally or correcting figures in accounts.

CIS has specific correction processes and using the wrong method can make matters worse.

Errors should be corrected through amended CIS returns or direct communication with HMRC, not through workarounds.

Leaving CIS entirely to someone else without oversight

Delegating CIS to a bookkeeper or administrator is sensible, but small contractors sometimes do this without any oversight.

Ultimately the responsibility for CIS compliance sits with the contractor, not the employee or adviser.

Having basic understanding and oversight helps catch issues early.

My experience with small contractors and CIS mistakes

From my experience the contractors who struggle most with CIS are not careless, they are simply unaware of how strict and separate the scheme is.

Once a simple process is in place, verification before payment, monthly returns, clear records, CIS becomes routine rather than stressful.

The contractors who suffer penalties and disputes are usually those who assume rather than check.

How small contractors can avoid most CIS mistakes

Most CIS mistakes can be avoided by

• Registering correctly from the start

• Verifying subcontractors before payment

• Submitting monthly returns on time

• Keeping clear records

• Using reliable software

• Seeking advice early when unsure

These are not complex steps, but they require consistency.

Final thoughts from experience

CIS is one of those areas where small mistakes can have disproportionate consequences, particularly for small contractors with limited time and resources.

The scheme is not designed to catch people out, but it is designed to be enforced automatically. Understanding the common mistakes helps you avoid them before they become expensive problems.

If there is one key takeaway it is this, CIS works best when it is treated as a routine monthly process rather than something to deal with when HMRC writes to you.

Getting the basics right saves time money and stress, and allows you to focus on running and growing your business rather than firefighting compliance issues.

You may also find our guidance on What are the deadlines for CIS submissions and What penalties apply for late CIS returns helpful when dealing with related CIS questions. For a broader overview of CIS rules, compliance, and support, you can visit our cis guidance hub.