HMRC Is Writing to CIS Contractors About Wrong Deduction Rates, Are You Affected?
As of 28 September 2026, HMRC's September Agent Update confirms that letters are being sent to Construction Industry Scheme (CIS) contractors who may have used the wrong deduction rate for subcontractors. Check your records whether you are a contractor or subcontractor. An incorrect rate can mean a tax bill for the contractor, or money due back to a subcontractor.
CIS requires contractors to deduct tax from payments to subcontractors and pass it to HMRC. The correct rate depends on the subcontractor's registration and verification status. A letter is not proof of an error, but you should check the facts and respond.
Know the three CIS deduction rates
Deductions generally apply to labour and certain other components, not every pound paid. Record labour and materials separately, and seek advice if unsure.
What could an HMRC letter mean?
HMRC's letters concern contractors who may have deducted too little or too much. If too little was deducted, HMRC may pursue the contractor for the shortfall. You should not assume the subcontractor will be asked to pay it instead. If too much was deducted, the subcontractor may be entitled to a refund, which can be reclaimed through their Self Assessment return or a CIS repayment claim.
Check which subcontractors and tax months are involved, the rate applied and whether figures match the return. Keep verification results, invoices, payment records, deduction statements and CIS returns. Good bookkeeping helps trace differences and support your response.
If a letter arrives, take these steps
- Read the letter. Note the deadline, tax periods and subcontractors named.
- Gather evidence. Compare invoices, payments, deduction calculations, verification records and returns.
- Check HMRC's rate. Verify each subcontractor before the first payment. Do not rely on an old email or verbal assurance.
- Respond promptly. Do not ignore the letter or guess. An accountant can help establish the facts and next steps.
Going forward, verify each new subcontractor through HMRC's online CIS service, record the outcome, calculate deductions consistently and reconcile each return to your books. Keep CIS separate from payroll.
Frequently asked questions
1. What is the CIS deduction rate?
There are three rates: 20% for verified registered subcontractors, 30% for unregistered or unverified subcontractors, and 0% for those with gross payment status. Contractors must verify each subcontractor with HMRC before the first payment to confirm the correct rate.
2. Why is HMRC writing to contractors now?
HMRC has identified contractors who may have applied the wrong deduction rate. This can mean the subcontractor was over- or under-deducted, which creates tax shortfalls or overpayments that HMRC wants to resolve.
3. What happens if I deducted too little?
HMRC may hold the contractor liable for the shortfall. It is important to check your records and respond promptly to any letter. Taking professional advice early can help limit penalties.
4. What if my subcontractor was over-deducted?
The subcontractor can reclaim the overpayment through their Self Assessment tax return or via a CIS repayment claim. Accurate records of payments and deductions made are essential.
5. What should I do if I receive an HMRC CIS letter?
Do not ignore it. Gather your CIS records, check which subcontractors are mentioned, verify the deduction rates applied, and speak to your accountant as quickly as possible.
6. How do I avoid CIS errors going forward?
Always verify subcontractors through HMRC's online CIS service before making the first payment. File your monthly CIS return by the 19th of each month and keep accurate records of all payments and deductions.
Need help with a CIS letter?
Our Guildford team can help you review CIS records, understand an HMRC query and plan a clear response. Explore our HMRC investigations and compliance support, or get in touch to discuss your situation.