What Happens If I Pay a Subcontractor Without Verifying Them
Before paying any subcontractor in the construction industry, contractors must verify their details with HMRC under the Construction Industry Scheme (CIS). This verification process confirms how much tax should be deducted from the payment. Failing to verify a subcontractor can result in higher tax deductions, incorrect payments, and penalties from HMRC. This guide explains what verification is, why it matters, and what happens if you skip this essential step.
Introduction
The Construction Industry Scheme (CIS) is designed to regulate payments between contractors and subcontractors in the UK construction sector. It ensures that the correct amount of tax is deducted at source and paid to HMRC.
Contractors are legally required to verify each new subcontractor before making their first payment. Verification helps HMRC confirm whether the subcontractor is registered for CIS and what deduction rate should be applied — 20 percent, 30 percent, or 0 percent if they have gross payment status.
Failing to verify can have costly consequences for both compliance and cash flow.
What subcontractor verification means
Verification is the process of checking a subcontractor’s tax status with HMRC before paying them for the first time. This process:
Confirms that the subcontractor is registered under CIS.
Determines whether you should deduct 20 percent, 30 percent, or make no deduction.
Ensures your CIS records and monthly returns are accurate.
Verification can be completed using HMRC’s online CIS service or compatible accounting software. Once verified, HMRC provides a unique verification number that must be included on your monthly CIS return.
Why verification is important
Verifying subcontractors protects both your business and the subcontractor. It ensures:
The correct tax rate is applied to payments.
CIS returns are accurate and compliant.
Subcontractors’ tax payments are recorded properly with HMRC.
Your business avoids financial penalties for non-compliance.
Verification is only required before the first payment to a new subcontractor. Once verified, you can continue to pay them without rechecking unless HMRC requests an update.
What happens if you pay a subcontractor without verifying them
If you skip the verification process, HMRC automatically classifies the subcontractor as unverified. As a result, you must:
1. Deduct tax at 30 percent
The most immediate consequence is that you must apply the highest CIS deduction rate of 30 percent instead of 20 percent or 0 percent. This can significantly reduce the subcontractor’s cash flow and damage your working relationship with them.
Even if the subcontractor is registered with HMRC, you cannot apply the lower rate until verification is complete.
Example
A contractor pays a verified subcontractor £2,000 for labour. With verification, they deduct 20 percent (£400) and pay £1,600. If the same subcontractor is unverified, the deduction rises to 30 percent (£600), and they only receive £1,400.
2. Potential HMRC penalties
Failing to verify subcontractors breaches CIS regulations. HMRC can issue financial penalties if it determines that you have not followed the correct procedures or filed inaccurate CIS returns.
Penalties depend on the severity and frequency of the offence, but even first-time errors can be costly.
3. Increased scrutiny from HMRC
If you repeatedly pay subcontractors without verifying them, HMRC may subject your business to a CIS compliance check or audit. This could involve reviewing your payroll, invoices, and CIS returns, leading to further penalties if additional mistakes are discovered.
4. Difficulty reclaiming overpaid deductions
If you apply the 30 percent deduction to an unverified subcontractor in error, you may face administrative challenges recovering the overpayment. While the subcontractor can claim the overpaid tax through their own tax return, your company will have to correct CIS submissions and maintain extra records to prove compliance.
5. Risk to gross payment status
If your company holds gross payment status under CIS, consistent non-compliance (such as not verifying subcontractors) can cause HMRC to withdraw it. Losing this status means tax deductions will be taken from payments you receive, affecting your own cash flow and reputation.
How to verify a subcontractor correctly
Verifying subcontractors is quick and straightforward. You can do it using:
HMRC’s online CIS verification service.
Commercial CIS-compatible accounting software such as Xero, Sage, or QuickBooks.
You will need the following information:
Subcontractor’s Unique Taxpayer Reference (UTR).
Subcontractor’s National Insurance number (for individuals) or Company Registration Number (for limited companies).
Subcontractor’s name and address.
Once verified, HMRC provides a verification number and confirms the deduction rate. This information should be recorded in your CIS records and used in all future payments and returns.
What to do if you realise you have not verified a subcontractor
If you have already made payments without verification, you should act quickly to correct the issue:
Verify the subcontractor immediately using HMRC’s CIS service.
Adjust your CIS records and deduction calculations to reflect the correct rate.
Contact HMRC to report the mistake and explain the steps taken to fix it.
Reissue the subcontractor’s payment statement with accurate details.
If necessary, amend your monthly CIS return to correct the figures.
By addressing the problem promptly and cooperating with HMRC, you can often minimise penalties and demonstrate that the error was unintentional.
How a CIS accountant can help
A CIS accountant can manage verification and compliance for you, ensuring your business meets all HMRC requirements. They can:
Register your business for CIS as a contractor and subcontractor if needed.
Verify subcontractors each month and record verification numbers.
File accurate CIS returns with HMRC by the monthly deadline.
Correct any mistakes and liaise with HMRC on your behalf.
Provide advice on maintaining gross payment status.
By outsourcing CIS management to an accountant, you reduce the risk of human error, avoid penalties, and save valuable time.
Example
BuildRight Ltd accidentally paid two new subcontractors without verifying them. Their accountant noticed the issue during monthly reconciliation, verified both subcontractors immediately, and amended the next CIS return. HMRC accepted the correction with no penalty because the company acted promptly and had professional records in place.
Common CIS compliance mistakes to avoid
Paying subcontractors before verification.
Missing monthly CIS return deadlines.
Applying the wrong tax rate.
Failing to keep verification numbers and payment statements.
Mixing up VAT and CIS deductions.
A well-organised CIS process helps avoid these errors and keeps your business compliant with HMRC rules.
Example scenario
Smith & Sons Construction Ltd hires a subcontractor for a roofing project but forgets to verify them before payment. The company pays £5,000 for the work without deductions. During its monthly CIS submission, HMRC flags the missing verification. The company must correct the payment, apply a 30 percent deduction, and file an amended return. An additional penalty of £100 is issued for filing errors.
After this incident, Smith & Sons implements a policy where all new subcontractors are verified before any payments are made.
Conclusion
Paying a subcontractor without verifying them under CIS can lead to unnecessary complications, including higher tax deductions, HMRC penalties, and compliance issues. The verification process is simple and protects your business by ensuring the correct tax is deducted and reported.
Working with a CIS accountant or using CIS-compatible software can streamline the process, keep your records accurate, and give you confidence that your company is fully compliant with HMRC’s Construction Industry Scheme requirements.