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

The Construction Industry Scheme creates a clear structure for how tax is collected from subcontractors. Every time you work for a contractor they deduct 20 percent from your labour and pass that money to HMRC on your behalf. Those deductions build up throughout the tax year and reduce your tax bill when you complete your Self Assessment or corporation tax return. For most subcontractors the system runs smoothly. Contractors deduct the right amount, submit their monthly CIS returns and pay HMRC on time. Yet there are situations where the system breaks down. One of the most worrying is when a contractor stops trading, goes bust or simply disappears while still owing HMRC the CIS deductions they took from your invoices.

If this happens the natural fear is that you will lose the tax credit entirely and end up paying tax twice. In my opinion this is one of the most stressful issues for subcontractors because the situation feels completely outside your control. You followed the rules, you provided your UTR number and verification details, you allowed the contractor to deduct tax, yet they failed to pass it on. The good news is that HMRC recognises this problem and has systems in place to deal with it. The challenge is that the process is not always straightforward and subcontractors often need to provide additional evidence to prove their position.

This article explains in detail what happens when your contractor stops trading but owes CIS deductions to HMRC, how it affects your tax return, what evidence HMRC expects, how to protect yourself and what steps you should take as soon as you realise there is a problem. The goal is to give you clarity so you can move forward confidently and avoid unexpected tax bills.

Understanding How CIS Deductions Work Behind the Scenes

Under CIS the contractor is responsible for deducting tax from your labour invoices and passing that tax to HMRC. They declare the deductions on their monthly CIS return. HMRC uses these returns to update your CIS record and link the deductions to your UTR number. When you reach the end of the tax year your CIS deductions should be visible on your HMRC account and your Self Assessment return will use them to offset your tax bill. If the deductions exceed your tax bill you receive a refund.

What many subcontractors do not realise is that HMRC does not give you credit for CIS deductions based solely on your invoices. They only recognise deductions that the contractor has actually submitted on their CIS return. If the contractor fails to file that return or files incorrectly the deductions do not appear on your record even if the contractor physically took the money from you.

An even bigger problem arises when the contractor stops trading. They may go into liquidation, close the business or simply vanish. If this happens after they have taken deductions but before they have submitted the return or before HMRC has accepted it the deductions may not be registered. This means your CIS history becomes incomplete and you may appear to owe more tax than you actually do.

What Happens When the Contractor Has Taken CIS Deductions but Not Paid HMRC

When a contractor goes bust or stops trading without submitting CIS returns the deductions are not recorded against your HMRC account. HMRC has no automatic record that those deductions took place. This leads to three problems.

The first is that your Self Assessment calculation will show a higher tax liability because the missing deductions are not taken into account. The second is that HMRC will not accept your claim for those deductions without additional evidence. The third is that HMRC may initially challenge your figures because their records do not match what you claim.

Although this sounds daunting HMRC does not expect subcontractors to suffer because of a contractor’s failure. They understand that subcontractors rely on contractors to follow the rules. HMRC’s job is to ensure they only give credit for legitimate deductions, which means you must prove they were taken.

How You Can Still Claim the Deductions

You can still claim the CIS deductions on your tax return even if the contractor did not submit their CIS return. HMRC will review your evidence and process your tax return manually if necessary. You must include the deductions on your Self Assessment exactly as they appear on your invoices or payslips. Once HMRC receives your return they may flag the claim for review because their records do not match. This is normal. It is part of the process when contractors fail to report deductions.

During the review HMRC will ask you for proof. Subcontractors may be asked to provide payslips or CIS statements showing:

• The contractor’s name and address

• The contractor’s employer reference

• Your name and UTR

• The payment amount

• The CIS deduction amount

Although HMRC requires this evidence to validate your claim the burden of error lies on the contractor, not on you. If your documentation is strong HMRC will update your account and allow the deductions.

What Happens If the Contractor Has Disappeared Without Issuing CIS Statements

The situation is more complicated when the contractor did not issue CIS payment and deduction statements. Some subcontractors receive payslips weekly or monthly while others receive them irregularly. If you do not have copies of these statements you may still be able to claim your deductions although you will need alternative evidence.

This may include:

• Copies of invoices you sent to the contractor

• Bank statements showing amounts paid to you

• Emails confirming rates or deductions

• Contracts or job sheets

• Text messages or other communication proving the working relationship

HMRC reviews all the evidence together. They may also refer to the contractor’s tax records if those records still exist. Even if the contractor has dissolved there is often enough information for HMRC to verify the relationship.

In my opinion subcontractors should always keep copies of their invoices and bank statements for every payment. These provide the minimum evidence HMRC needs to build a picture of what happened.

What Happens If the Contractor Goes Into Liquidation

If the contractor enters administration or liquidation the appointed insolvency practitioner may have access to the contractor’s financial records. They may still file outstanding CIS returns although this varies depending on the insolvency situation. If the insolvency practitioner files the returns then your deductions should eventually show on your HMRC record. If the practitioner does not file the returns then you must rely on your own evidence to make a claim.

Liquidation often slows the process because HMRC may need to liaise with the insolvency practitioner. However subcontractors are not expected to recover money from the insolvent company. HMRC will handle the tax aspect through their own internal processes.

Does HMRC Hold You Responsible for the Contractor’s Mistakes

No. HMRC does not penalise the subcontractor if the contractor fails to pass CIS deductions to HMRC. CIS is structured so that the contractor holds responsibility for filing and paying those deductions. Your only responsibility is to provide your correct UTR, submit correct invoices and keep accurate records. HMRC understands that subcontractors cannot force contractors to submit their returns.

The only time HMRC may challenge you personally is if they believe the documentation is fraudulent or untrustworthy. As long as your records are genuine you will not be held responsible for the contractor’s failures.

How Long HMRC Takes to Resolve Missing CIS Deductions

When you file your tax return HMRC will often process it normally then pause the repayment while they review your evidence. This can slow your refund or create a delay in finalising your tax bill. The time frame varies although it is common for the process to take a few weeks to a few months depending on the complexity of the missing deductions.

If HMRC rejects your evidence they will write to you explaining what they need. You can then submit stronger documentation. HMRC will not simply close the case without giving you the opportunity to respond.

In practice many subcontractors experience a slower refund the first time this happens then smoother processing in future years once HMRC becomes familiar with their work pattern. In my view patience pays off because HMRC ultimately aims to reach the right answer.

What You Should Do as Soon as You Discover the Problem

If your contractor has stopped trading and you realise they owe CIS deductions the most important thing is to gather every piece of documentation you have. This includes invoices, payment statements, bank statements and any written communication that proves the deduction took place.

Next you should speak to your accountant. They can help structure the information and prepare your return correctly. They can also handle communication with HMRC which can be helpful if HMRC requests additional evidence.

If the contractor is in liquidation you may want to note down the name of the insolvency practitioner. HMRC may ask for it. You do not have to contact them yourself although sometimes providing the contact details can speed up the process.

You should continue filing your return on time. Do not delay your tax return simply because deductions are missing from HMRC’s records. Filing late causes more issues.

How to Protect Yourself in the Future

Although you cannot fully eliminate the risk of a contractor disappearing you can significantly reduce the complexity by keeping organised records. Always keep copies of CIS statements, even if they arrive by text message or WhatsApp. Save your invoices and arrange them by month or by contractor. Download bank statements regularly and keep them safe. Many subcontractors find it useful to use cloud accounting apps that automatically store digital copies of invoices and receipts.

Another protective measure is choosing contractors carefully. Contractors with a reputation for late payment or poor communication are often the same contractors who fall behind on CIS responsibilities. Although you cannot always avoid risk you can be selective about who you work with.

You should also check whether the contractor appears on your HMRC payment record. Although subcontractors do not have a CIS portal that shows live deductions some information becomes visible at tax time. If you notice a contractor is consistently missing it may be a sign they are not submitting returns properly.

Real World Examples

One common scenario involves subcontractors who work regularly for a small contractor. The contractor falls behind on their own tax and eventually closes the business. The subcontractor has worked for them for several months and has had thousands deducted through CIS but none of the deductions appear on their HMRC record. When the subcontractor files their tax return HMRC flags the missing amounts. The subcontractor provides invoices showing CIS deductions and bank statements confirming payment. HMRC accepts the evidence and updates the account. The subcontractor receives a refund as expected.

Another example involves a contractor who issued handwritten CIS slips that later turned out to be inconsistent. HMRC requested additional evidence from the subcontractor because the contractor had gone bankrupt and the records were incomplete. The subcontractor provided work schedules, text messages confirming rates and bank records. HMRC reconstructed the deductions manually and approved the claim.

A more difficult scenario occurs when subcontractors accept cash payments without formal invoices or CIS slips. When the contractor disappears there is no proof that deductions were taken. HMRC cannot give credit for deductions without evidence. This is why documentation is crucial.

Conclusion

If your contractor stops trading but owes CIS deductions you can still claim those deductions as long as you have evidence. HMRC does not expect subcontractors to lose out because of contractor failures. The process may take longer and HMRC may request additional information but you will not pay tax twice. Filing your return on time, keeping thorough records and responding promptly to HMRC requests are the keys to resolving the situation smoothly.

In my opinion this situation is stressful but manageable. The best defence is good documentation. With organised records and clear invoices you can protect yourself even if the contractor disappears. The Construction Industry Scheme can feel complicated at times although once you understand how HMRC handles missing deductions the process becomes far less intimidating.