What Happens If My Contractor Has Stopped Trading but Owes CIS Deductions

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 one of the most worrying situations a subcontractor can find themselves in, and I usually hear about it after a payment has gone wrong or a tax return does not look the way it should. Someone has worked under CIS, tax has been deducted from their payments, they have been given CIS statements, then later they discover the contractor has ceased trading, gone quiet, or even disappeared altogether. The natural fear is obvious, has the tax actually been paid to HMRC, will HMRC still treat it as paid on my behalf, and could I end up paying tax twice.

From my experience running my own accountancy firm and dealing with CIS issues for many years, this situation is stressful but it is not uncommon, and importantly it does not automatically mean you are at fault. CIS places very specific responsibilities on contractors, and HMRC understands that subcontractors are not in control of what happens after deductions are made. However, how things play out depends heavily on records, timing, and how the issue is handled.

In this article, I am going to explain what happens if your contractor has stopped trading but owes CIS deductions, who is responsible for what, how HMRC usually treats the situation, and what practical steps you should take to protect yourself. I will also explain where problems can arise, because while subcontractors are generally protected, mistakes and delays can still cause issues if they are not dealt with properly.

Understanding Who Is Responsible for CIS Deductions

The first and most important point to understand is this, under CIS, the responsibility for deducting and paying CIS tax to HMRC sits with the contractor, not the subcontractor.

If a contractor deducts CIS tax from your payment, that money is no longer yours. It becomes money held on behalf of HMRC. The contractor is legally required to report those deductions through their monthly CIS return and pay them over to HMRC by the deadline.

As a subcontractor, your responsibility is to declare your income correctly and claim credit for CIS deductions that have been made from your payments. You are not responsible for policing whether the contractor has actually paid the money over, provided you have evidence that the deductions were made.

This distinction is absolutely critical, because it underpins how HMRC approaches cases where a contractor fails or stops trading.

What It Means When a Contractor Stops Trading

A contractor stopping trading can mean several different things.

They may have formally ceased trading and closed the business
They may have gone insolvent or entered liquidation
They may simply have stopped responding and abandoned the business
They may still exist legally but are no longer operating

From a CIS perspective, the key issue is whether they submitted CIS returns and paid the deductions they took from subcontractors.

When a contractor stops trading, it is very common for CIS compliance to fall apart in the final months. Returns may not be filed, deductions may not be paid over, and HMRC records may be incomplete.

This is where subcontractors start to worry, particularly when they log into their HMRC account and see missing or incomplete CIS records.

If CIS Was Deducted From You but Not Paid to HMRC

This is the scenario that causes the most concern.

You were paid under CIS
Tax was deducted from your payments
You have CIS deduction statements
The contractor has stopped trading
HMRC records do not show the deductions

In principle, HMRC should still give you credit for CIS deductions that were genuinely made, even if the contractor failed to pay them over. HMRC’s own guidance recognises that subcontractors should not be penalised for a contractor’s failure.

However, and this is where experience matters, HMRC will usually require evidence.

Why CIS Deduction Statements Are So Important

CIS deduction statements are your primary protection in this situation.

Contractors are legally required to provide subcontractors with monthly CIS deduction statements showing the gross payment, the amount deducted, and the period it relates to. These statements are not just paperwork, they are evidence that tax was deducted.

If you have valid CIS deduction statements, HMRC will usually accept that the deductions were made and credit them to you, even if the contractor never paid the money over.

If you do not have deduction statements, the situation becomes more difficult, not impossible, but harder to prove.

This is why I always stress to subcontractors that CIS statements should be treated like payslips, they need to be kept safely and matched to payments received.

What HMRC Will Usually Look At

When a contractor has stopped trading and CIS deductions are in question, HMRC will typically look at several things.

CIS deduction statements issued to you
Your invoices showing labour and CIS deductions
Bank statements showing net payments received
Any correspondence with the contractor
HMRC’s own CIS records

HMRC is essentially trying to establish whether tax was genuinely deducted from your income.

If the evidence supports that deductions were made, HMRC will usually allow you to claim credit for those deductions, even if they were never paid over by the contractor.

What Happens on Your Tax Return

From your point of view as a subcontractor, you still complete your tax return in the normal way.

You declare your gross CIS income
You deduct your allowable expenses
You enter the CIS tax deducted

If the deductions you enter match what HMRC has on record, everything proceeds normally.

If the deductions you enter are higher than HMRC’s records, this is often where the issue surfaces. HMRC may automatically restrict the credit given or raise a query.

This does not mean you are wrong. It means HMRC’s records are incomplete.

How HMRC Handles Disputes Over Missing CIS Deductions

When HMRC’s records do not match what you are claiming, they may initially deny the credit or ask for clarification.

At this point, evidence is key.

Providing CIS deduction statements, invoices, and bank statements usually resolves the issue. HMRC can manually adjust records where appropriate, although this can take time.

In my experience, subcontractors who engage early and provide clear evidence tend to get the issue resolved. Those who ignore the problem or submit incomplete information often face delays or prolonged correspondence.

What If You Do Not Have CIS Deduction Statements

This is where things get more complicated, but not necessarily hopeless.

If you do not have formal CIS deduction statements, HMRC may still accept other evidence, such as:.

Invoices clearly showing CIS deductions
Payment schedules
Bank statements showing reduced payments
Written confirmation from the contractor

However, the burden of proof becomes heavier. HMRC may challenge the figures more closely, and the process can take longer.

This is one of the reasons I strongly advise subcontractors to chase CIS statements regularly, even when everything seems fine.

The Risk of Paying Tax Twice

The biggest fear subcontractors have in this situation is being taxed twice, once through CIS deductions and again through their tax return.

In principle, HMRC should not do this if you can demonstrate that deductions were made. The tax system is not designed to collect the same tax twice.

In practice, delays or disputes can make it feel like this is happening, especially if HMRC initially refuses to give credit. Persistence and evidence are usually the solution.

I have handled many cases where clients were eventually given full credit for deductions after HMRC reviewed the evidence.

What Happens if the Contractor Is Insolvent

If the contractor has gone into liquidation or insolvency, CIS issues often form part of a wider HMRC investigation into the company.

HMRC will pursue the contractor or insolvency practitioner for unpaid CIS deductions. This process is separate from your position as a subcontractor.

You are not expected to chase the contractor for CIS payments or act as a creditor in respect of CIS tax. That is HMRC’s role.

Your focus should remain on protecting your own tax position.

Time Limits and Delays

One important thing to be aware of is timing.

Resolving CIS issues involving ceased contractors often takes longer than normal. HMRC may need to carry out manual checks, and responses can be slow.

This can delay tax refunds, particularly if you are due a repayment based on CIS deductions.

While frustrating, this does not usually mean the claim will fail. It means patience and follow up are required.

What You Should Do as Soon as You Become Aware

If you discover that a contractor has stopped trading and CIS deductions may be unpaid, there are some practical steps you should take.

Gather all CIS deduction statements
Collect invoices and payment records
Check your CIS figures online
Make notes of when the contractor stopped trading
Do not delay filing your tax return

Filing your return on time, even if there is a dispute, is important. Issues can be resolved after submission, but late filing creates separate penalties.

Should You Contact HMRC Directly

In many cases, yes, but how and when matters.

If you are filing a tax return and notice missing CIS deductions, it is often best to submit the return with the correct figures and then respond if HMRC queries it.

In other cases, particularly where large amounts are involved, contacting HMRC proactively with evidence can help.

This is an area where professional support is very valuable, because knowing how to present the issue makes a significant difference to how quickly it is resolved.

How an Accountant Helps in These Situations

This is one of the clearest examples of where having an accountant helps.

An accountant can assess the evidence, advise how to report the figures correctly, deal with HMRC correspondence, and push back where necessary.

In my experience, HMRC takes submissions more seriously when they are structured clearly and supported by documentation, rather than emotional explanations or incomplete information.

Common Mistakes I See

There are a few recurring mistakes subcontractors make in this situation.

They underclaim CIS deductions out of fear
They delay filing tax returns
They ignore HMRC letters
They discard CIS statements too early
They assume HMRC will fix it automatically

Each of these can make the situation worse rather than better.

The Bigger Picture

From a wider perspective, CIS is designed to protect the tax system, but it also recognises that subcontractors are not responsible for contractor failures.

HMRC’s systems are not perfect, and when businesses stop trading suddenly, records are often incomplete. The system relies on evidence and follow up to correct this.

Understanding that helps remove some of the fear.

Final Thoughts

If your contractor has stopped trading but owes CIS deductions, it is understandably worrying, but it does not automatically mean you will lose out.

In most cases, provided you have evidence that CIS was deducted from your payments, HMRC will credit those deductions to you, even if the contractor failed to pay them over.

The key is records, invoices, CIS deduction statements, and bank payments are your protection. The earlier you gather them and address the issue, the smoother the process tends to be.

In my experience, the subcontractors who struggle most in these situations are not those who did anything wrong, but those who delay dealing with it or assume it will resolve itself. With the right approach, patience, and documentation, these cases are usually resolved, and the tax system does what it is meant to do, tax the right person, once, and no more than that.

You may also find our guidance on How do I deal with HMRC CIS enquiries or investigations and How can I appeal a CIS penalty helpful when dealing with related CIS questions. For a broader overview of CIS rules, compliance, and support, you can visit our cis guidance hub.