What Are the Common CIS Mistakes Small Contractors Make

1. Failing to register for CIS

One of the biggest mistakes small contractors make is starting work without registering for the Construction Industry Scheme. If you pay subcontractors for construction work, you are classed as a contractor under CIS and must register with HMRC before making payments.

Failing to register means you will have to deduct 30% tax instead of the standard 20% from payments to subcontractors. You could also face fines or penalties for non-compliance.

To avoid this, register online through HMRC as soon as you start hiring subcontractors or before beginning a new project that involves paying them.

2. Not verifying subcontractors

Before paying any subcontractor, you must verify them with HMRC to check their CIS status and determine the correct deduction rate. This process confirms whether the subcontractor is registered for CIS and whether to apply the 20%, 30%, or 0% (gross payment status) rate.

Some small contractors forget to verify new subcontractors, assume the wrong rate, or continue using an old rate after a status change. This can lead to incorrect tax deductions and compliance issues.

Verification is quick and can be done online or through compatible payroll software. Always recheck subcontractor details periodically to ensure their CIS status has not changed.

3. Making incorrect CIS deductions

Even when contractors verify subcontractors, errors can occur when calculating CIS deductions. Common mistakes include:

• Applying the wrong tax rate (20% instead of 30% or vice versa).

• Deducting CIS from materials or VAT, which should not be included in the taxable amount.

• Forgetting to exclude items such as fuel, plant hire, or equipment costs when calculating deductions.

CIS should only be applied to labour costs after removing VAT and materials. Incorrect deductions can frustrate subcontractors, create extra admin work, and cause HMRC discrepancies later.

Always check each invoice carefully and ensure it clearly separates labour and materials.

4. Missing or late CIS returns

Every month, contractors must submit a CIS return to HMRC, even if they made no payments to subcontractors in that period.

Each return must include details of all payments, deductions, and subcontractors paid during the month. The deadline is the 19th of each month following the payment period.

For example, payments made in July must be reported by 19 August.

Missing or late CIS returns can lead to automatic penalties, which increase the longer the return remains outstanding:

• £100 if late by one day.

• £200 if late by two months.

• £300 or 5% of the CIS deductions if late by six months.

Using accounting software or setting calendar reminders can help ensure you meet the deadlines every month.

5. Not providing payment and deduction statements

Contractors are required to give subcontractors a payment and deduction statement (sometimes called a CIS statement) for each payment period.

This document shows:

• The gross amount paid.

• The cost of materials (if applicable).

• The amount of CIS tax deducted.

Some small contractors forget to issue these statements or do so irregularly. Without them, subcontractors cannot accurately complete their tax returns or reclaim overpaid CIS tax.

You can generate these automatically using CIS-compliant accounting or payroll software.

6. Including VAT in CIS calculations

One of the most frequent mistakes under CIS is calculating deductions based on the invoice total including VAT.

CIS should only apply to the labour element excluding VAT. If you include VAT in the calculation, you will over-deduct tax, leading to errors that must later be corrected.

Always check that the labour and material costs are clearly listed before applying CIS to the labour amount only.

7. Treating employees as subcontractors

Sometimes small contractors classify workers as subcontractors when they should actually be employees. This is often done to simplify administration or avoid PAYE obligations, but HMRC can penalise firms for false self-employment.

If you control when, where, and how someone works and supply the materials or equipment, they may be classed as an employee, not a subcontractor.

Using the Check Employment Status for Tax (CEST) tool on HMRC’s website can help determine the correct employment status.

8. Poor record keeping

CIS requires contractors to maintain detailed records of payments, deductions, verification numbers, and statements. Failing to keep accurate records can make it difficult to resolve disputes or prove compliance during an HMRC audit.

HMRC expects contractors to keep CIS records for at least three years. These include:

• Subcontractor details and verification numbers.

• Copies of invoices and CIS statements.

• Payment records and deduction calculations.

Digital accounting systems make it easier to store this information securely and generate reports when needed.

9. Forgetting to file nil returns

If you do not pay any subcontractors in a given month, you must still file a nil return to HMRC. Some small contractors mistakenly believe they can skip the return altogether, which triggers late filing penalties.

You can file nil returns online in minutes, and most accounting software will prompt you automatically when no payments have been made.

10. Not reconciling CIS deductions with HMRC

Another common mistake is failing to reconcile CIS deductions with HMRC’s records at the end of the year. Differences often occur due to:

• Missed CIS returns.

• Incorrect deduction rates.

• Subcontractor details not matching HMRC records.

Reconciling regularly helps identify and correct discrepancies before HMRC issues penalties or conducts an investigation.

How to avoid CIS mistakes

CIS compliance can be challenging for small contractors, but most errors are preventable with the right systems and habits:

• Register for CIS early and verify all subcontractors.

• Use CIS-compliant accounting or payroll software.

• Keep detailed records of payments, materials, and deductions.

• Submit monthly returns on time, even if nil.

• Review all calculations to exclude materials and VAT from deductions.

• Seek professional help from an accountant experienced in CIS.

How an accountant can help

An accountant who specialises in the construction industry can save time and prevent errors by:

• Setting up your CIS registration and verifying subcontractors.

• Calculating and submitting monthly returns.

• Checking deduction rates and ensuring compliance with HMRC.

• Managing your PAYE and payroll if you have employees.

• Helping subcontractors reclaim overpaid CIS tax.

With expert support, you can focus on running your projects while staying fully compliant with HMRC requirements.

Final thoughts

CIS compliance is one of the biggest challenges small contractors face, and mistakes can lead to unnecessary tax payments, penalties, and stress. By understanding the most common errors such as incorrect deductions, late returns, and missing verification you can take steps to avoid them.

Using proper accounting software, maintaining organised records, and seeking help from a CIS-experienced accountant ensures your business remains compliant and efficient. Staying on top of CIS rules will not only save you money but also strengthen your reputation with subcontractors and HMRC alike.