What Happens If I Pay a Subcontractor Without Verifying Them

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.

This is a situation I come across far more often than people admit, usually not because someone is trying to cut corners, but because CIS rules are misunderstood or a payment is made in a rush. A subcontractor starts work quickly, an invoice comes in, payment is due, and only afterwards does someone realise that the subcontractor was never verified with HMRC under the Construction Industry Scheme.

At that point the questions start. Is it a problem, can it be fixed, what will HMRC do, and who ends up paying if something has gone wrong.

In this article I want to explain clearly what happens if you pay a subcontractor without verifying them, why verification matters so much under CIS, how HMRC treats these situations, what the financial consequences can be, and what practical steps you should take if this has already happened. This is written from real experience of dealing with CIS compliance checks, correcting historic errors, and helping contractors minimise damage when mistakes are discovered late.

Why subcontractor verification exists under CIS

Verification is a core part of the CIS system. Before a contractor pays a subcontractor for construction work, they are required to verify that subcontractor with HMRC. This verification confirms two key things.

First, it confirms that the subcontractor is registered with HMRC. Second, it tells the contractor what rate of CIS deduction should be applied.

HMRC uses verification to ensure tax is deducted at the correct rate and that payments are correctly matched to the subcontractor’s tax record. Without verification, HMRC has no reliable way of knowing whether the subcontractor is compliant or whether the right amount of tax is being collected.

That is why verification is not optional and not something that can be skipped casually.

What HMRC expects contractors to do before paying

Under CIS rules, verification should be completed before the first payment is made to a subcontractor. Once verified, that verification can usually be relied on for future payments, unless the subcontractor’s status changes.

Verification is not a one off administrative nicety. It is a legal requirement placed on the contractor.

If you pay a subcontractor without verifying them, HMRC treats that as a failure to follow CIS rules, regardless of whether the subcontractor later turns out to be compliant.

What happens automatically if a subcontractor is not verified

If a subcontractor is not verified, HMRC requires the contractor to deduct CIS tax at the highest rate.

This higher rate is designed to protect HMRC where a subcontractor’s status is unknown. It is deliberately punitive in cash flow terms to encourage verification.

If you pay a subcontractor without verifying them and you do not apply the higher deduction rate, HMRC will usually treat that as under deducted tax.

In simple terms, HMRC assumes you should have deducted more tax than you did.

The immediate risk for the contractor

The immediate risk sits with the contractor, not the subcontractor.

If you pay a subcontractor without verifying them and deduct tax at the wrong rate or not at all, HMRC can later assess you for the tax that should have been deducted.

This means HMRC can ask you to pay the missing CIS tax out of your own funds, even if you have already paid the subcontractor in full.

This often comes as a shock to contractors who assume the problem sits with the subcontractor. Under CIS, it usually does not.

Why HMRC holds the contractor responsible

HMRC places responsibility on the contractor because the contractor controls the payment process.

The logic is that the contractor is in the best position to verify subcontractors, apply deductions, and submit accurate returns. If verification is skipped, HMRC treats that as a failure of the contractor’s compliance system.

Even if the subcontractor is fully registered and pays their own tax later, HMRC can still pursue the contractor for failing to follow the correct CIS process.

This feels harsh, but it is how the scheme is designed.

What happens during an HMRC CIS compliance check

If HMRC identifies payments made to unverified subcontractors, this often comes up during a CIS compliance check.

HMRC will usually review your CIS monthly returns, compare them to bank payments, and look at verification records. If they see payments where no verification took place, they will ask questions.

At that point, HMRC will look at:.

• Whether the subcontractor should have been verified

• What deduction rate should have applied

• How much tax should have been deducted

• Whether CIS returns were accurate

If tax was under deducted, HMRC may issue an assessment for the difference.

Penalties and interest

In addition to the tax itself, penalties and interest may apply.

HMRC considers the behaviour that led to the error. If the failure to verify was careless rather than deliberate, penalties may be reduced. If the issue is disclosed voluntarily before HMRC raises it, penalties are often reduced further.

Interest is usually charged on any underpaid CIS tax, regardless of intent.

The earlier the issue is identified and addressed, the better the outcome tends to be.

What if the subcontractor was actually registered

A common response I hear is, but the subcontractor was registered, so surely it does not matter.

Unfortunately, that does not remove the contractor’s obligation.

If the subcontractor was registered, HMRC may eventually credit the tax to the subcontractor’s record, but that does not automatically remove the contractor’s liability for failing to verify and apply the correct rate at the time of payment.

In some cases, HMRC may exercise discretion where evidence shows the subcontractor was compliant and tax was ultimately paid, but this cannot be relied on.

The safest assumption is that lack of verification creates a contractor risk regardless of the subcontractor’s status.

What if this only happened once

Even a single unverified payment can technically trigger an issue.

In practice, HMRC is more likely to focus on patterns rather than isolated incidents, but that does not mean one off mistakes are ignored.

If it genuinely happened once, was corrected promptly, and systems were improved, HMRC is more likely to view it as careless rather than deliberate.

Documenting what went wrong and what was done to prevent repetition can be helpful if HMRC reviews the situation.

Paying before verification because of urgency

This is a very common scenario.

A subcontractor starts urgently, work is completed quickly, and payment is expected immediately. Verification is overlooked in the rush.

From HMRC’s perspective, urgency does not remove the obligation to verify. However, HMRC does recognise commercial reality when assessing behaviour.

If verification was missed due to genuine oversight rather than avoidance, and corrected quickly, this often helps mitigate penalties.

It does not remove the underlying issue, but it does influence how HMRC responds.

What you should do if you realise you paid without verifying

If you realise that you have paid a subcontractor without verifying them, the worst thing you can do is ignore it and hope it never comes up.

The correct approach is to act quickly.

First, verify the subcontractor with HMRC as soon as possible, even if the payment has already been made.

Second, review the payment and calculate what CIS deduction should have applied.

Third, correct your CIS records and returns if necessary.

Fourth, if tax was under deducted, be prepared to pay the difference to HMRC.

Voluntary disclosure usually leads to a far better outcome than waiting for HMRC to find the issue.

Amending CIS returns

If you paid a subcontractor without verifying them and submitted a CIS return showing the wrong deduction, you may need to amend that return.

Amended returns allow HMRC to see the corrected position and update the subcontractor’s record accordingly.

This process should be handled carefully, as repeated amendments can raise questions if not explained properly.

Accurate records and clear explanations help.

Can you recover the tax from the subcontractor

In theory, you may be able to recover under deducted tax from the subcontractor, particularly if your contract allows for it.

In practice, this is often difficult.

The subcontractor may no longer be working with you, may dispute liability, or may simply be unable or unwilling to pay.

This is why CIS places the risk on the contractor. HMRC does not get involved in recovering money from subcontractors on your behalf.

This is also why verification before payment is so important.

Employment status complications

Another risk that can arise when verification is missed is increased scrutiny of employment status.

If HMRC sees poor CIS controls, they may look more closely at whether subcontractors are genuinely self employed or should have been treated as employees.

This can significantly increase the scope and cost of an investigation.

Strong CIS procedures help demonstrate that subcontractors are being engaged properly.

The impact on subcontractors

While the main risk sits with the contractor, subcontractors can also be affected.

If CIS deductions are applied incorrectly or not reported properly, subcontractors may find deductions missing from HMRC records, which can delay tax refunds or cause issues when filing tax returns.

This can strain relationships and damage trust.

Good CIS processes protect both parties.

How to prevent this happening again

From experience, the best prevention is process rather than memory.

This includes:.

• Verifying all subcontractors before first payment

• Using accounting software that prompts verification

• Training staff involved in payments

• Not releasing payment until CIS checks are complete

• Keeping verification records accessible

Building verification into your onboarding process removes reliance on last minute checks.

Using accounting software to manage verification

Most CIS enabled accounting software includes verification tools.

When used properly, these tools reduce the risk of paying unverified subcontractors by flagging missing information and applying default higher rates automatically.

However, software only works if it is set up correctly and used consistently.

Manual overrides without understanding CIS rules are a common source of error.

HMRC discretion and reasonable excuse

HMRC does have discretion when dealing with CIS failures.

If you can show that there was a reasonable excuse, that the error was not deliberate, and that steps were taken to correct and prevent it, penalties may be reduced or cancelled.

However, reasonable excuse does not usually include lack of knowledge of the rules. Contractors are expected to understand CIS obligations.

When professional advice is important

If you have paid multiple subcontractors without verification, or if the amounts involved are significant, professional advice is strongly recommended.

An adviser can help assess exposure, manage disclosures, and communicate with HMRC in a structured way.

From experience, early advice often saves money and stress later.

Common myths about verification failures

One myth is that verification only matters the first time you work with someone. In reality, verification must be done before the first payment, not after.

Another is that paying by bank transfer rather than cash reduces risk. It does not.

A third is that if the subcontractor pays their own tax, HMRC will not care. HMRC still cares about the process.

Understanding these points avoids false reassurance.

Final thoughts

So what happens if you pay a subcontractor without verifying them. In short, the risk sits with you as the contractor.

HMRC expects verification before payment. If it is missed and tax is under deducted, HMRC can require you to pay the difference, along with interest and potentially penalties.

The good news is that genuine mistakes can be corrected, and HMRC often takes a pragmatic approach where issues are identified early and dealt with openly.

From experience, the contractors who suffer the most are not those who make occasional mistakes, but those who ignore CIS controls altogether.

Verification is not just a box to tick. It is a key protection for your business.

You may also find our guidance on How do I verify a subcontractor under CIS and How do I file monthly 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.