CIS deduction rates, verification and monthly returns
Overview
The Construction Industry Scheme (CIS) requires contractors to make deductions from certain payments to subcontractors for construction work and report the payments to HMRC. The rate depends on the subcontractor’s status confirmed by HMRC, not the contractor’s own gross payment status.
The standard rates are 20% for registered subcontractors, 30% for unregistered subcontractors or where HMRC cannot verify the subcontractor, and no deduction where HMRC confirms gross payment status. Always use the latest rate notified by HMRC.
HMRC’s September 2026 Agent Update announced that it would write to CIS-registered contractors in October 2026 where it had identified errors in monthly returns. The highlighted issues were incorrect deduction rates, material costs not recorded separately and incorrect payment or deduction figures.
Detailed content
CIS deduction rates
Registered subcontractor subject to deductions - (20%)
Unregistered subcontractor, or HMRC unable to verify the subcontractor - (30%)
Subcontractor with confirmed gross payment status - (0%, no CIS deduction)
Not having gross payment status does not automatically mean a 30% deduction. A registered subcontractor without gross payment status will normally be subject to 20%, as confirmed by HMRC.
When verification is required
Verify a new subcontractor before making the first payment. You must also verify a subcontractor used previously if you have not included them on a CIS return in the current or previous two tax years.
Verification can be carried out through HMRC’s CIS online service or suitable commercial CIS software. Keep the verification result, date and reference, including any subcontractor-specific reference HMRC provides.
You do not normally need to carry out a fresh verification before every payment to an existing subcontractor who falls within those reporting conditions. However, you must act on any later HMRC notification changing the deduction rate. Do not rely on the subcontractor’s claim or continue using an old rate after HMRC has notified you of a change.
CIS verification does not establish that someone is genuinely self-employed. Check employment status separately before treating a worker as a subcontractor.
Calculating the deduction
Apply the rate to the correct payment amount, not automatically to the whole invoice. Exclude VAT and qualifying costs under HMRC’s rules, such as materials directly paid for by the subcontractor and eligible plant hire or other specified costs.
Check the actual allowable materials cost and retain supporting evidence. A separately stated invoice amount does not, by itself, establish that the whole amount qualifies for exclusion. Do not exclude a materials mark-up as though it were the subcontractor’s actual cost.
Record the payment, qualifying material costs and deduction separately. Where a deduction is made, give the subcontractor a payment and deduction statement within 14 days after the end of the tax month, normally by the 19th.
Monthly returns and payments
A CIS tax month runs from the 6th of one month to the 5th of the next. File the monthly return by the 19th following the end of that tax month. For example, payments made from 6th September to 5th October 2026 belong on the return due by 19th October 2026.
Include reportable payments to subcontractors with gross payment status as well as those from which deductions were made.
If no subcontractors were paid, submit a nil return or notify HMRC of inactivity as appropriate. An inactivity request can cover a period of up to six months; resume reporting when payments restart.
CIS deductions are normally payable to HMRC by the 22nd when paying electronically, or the 19th when paying by post. Where HMRC permits quarterly payment, follow the applicable quarterly payment deadline. Filing the return and paying the deductions are separate obligations.
Late returns and other errors
One day late - (£100)
Two months late - (A further £200)
Six months late - (A further £300 or 5% of the CIS deductions on the return, whichever is higher)
Twelve months late - (A further £300 or 5% of the CIS deductions on the return, whichever is higher)
Special rules can affect the amount, including more serious cases involving information deliberately withheld and reliefs for certain new contractors. These are not simply fixed penalties increasing every month to £3,000.
Incorrect returns and late payments have separate penalty rules. The consequences depend on the facts, including the behaviour behind an error. Check the HMRC notice and obtain advice; a CIS late-filing penalty can generally be appealed within 30 days of the notice date.
Responding to HMRC
If HMRC contacts you, check that the message is genuine, identify the periods concerned and compare it with your verification records, invoices, payments and returns. HMRC’s October correspondence programme concerns identified errors, but the precise position for your business still needs checking.
Using too low a rate can leave the contractor liable for deductions that should have been made. Relief may be available in limited circumstances, but it is not automatic. Do not assume the problem can simply be passed to the subcontractor.
Correct errors promptly using HMRC’s current process and respond within any stated deadline. Keep CIS records for at least three years after the end of the relevant tax year, and longer where another accounting or tax requirement applies.
Gross payment status
Subcontractors can apply for gross payment status if they meet HMRC’s business, turnover and compliance tests. Approval is not automatic, and HMRC can review or withdraw the status.
Gross payment status means no CIS deduction is made; it does not make the income tax-free. The subcontractor remains responsible for the relevant tax obligations. Contractors should only pay gross where HMRC has confirmed that treatment through verification or a subsequent notification.
Step-by-step procedure
Check the arrangement. Confirm that the work falls within CIS and assess the worker’s employment status.
Verify when required. Verify new subcontractors and those outside the current-or-previous-two-tax-years reporting condition. Keep the result and reference.
Use the latest HMRC rate. Apply 20%, 30% or gross treatment as notified, and update records when HMRC changes the status.
Check the calculation. Separate VAT and qualifying costs, substantiate materials costs and calculate the deduction on the correct amount.
Provide the statement. Where deductions are made, issue the payment and deduction statement by the required deadline.
Reconcile and file. Check payments, material costs and deductions against your records before submitting the return by the 19th. Include gross payments; deal with nil months or inactivity correctly.
Pay HMRC and retain evidence. Pay deductions by the applicable deadline and retain returns, statements, verification evidence and payment records.
Resolve discrepancies promptly. Investigate HMRC correspondence, correct errors and seek advice where liability or the deduction rate is disputed.
Frequently asked questions
Does a subcontractor without gross payment status always suffer 30% deductions?
No. Registered subcontractors normally have deductions at 20%. The 30% rate applies where HMRC directs the higher rate, such as where the subcontractor is unregistered or cannot be verified.
Must I verify the subcontractor before every payment?
Not normally. Verify before paying a new subcontractor, and reverify a previous subcontractor if they have not appeared on your CIS returns in the current or previous two tax years. Always use any later rate notified by HMRC.
Why is HMRC contacting contractors in October 2026?
The September Agent Update announced October letters about identified monthly-return errors involving deduction rates, material costs and payment or deduction figures. Review the specific letter and underlying records rather than assuming it concerns rates alone.
What happens if I deduct too little?
The contractor may be liable for the shortfall. Corrective action and any possible relief depend on the circumstances. Obtain advice before changing payments or attempting to recover amounts from a subcontractor.
Do gross payments still go on the CIS return?
Yes. Gross payment status removes the deduction, not the contractor’s obligation to report the relevant payment.
Are materials always excluded from CIS deductions?
No. Apply HMRC’s rules to qualifying costs actually incurred by the subcontractor. Keep evidence and distinguish actual materials costs from profit or mark-up.
Can 360 Accounts help?
We can help review verification records, reconcile subcontractor payments, check CIS calculations and prepare or correct monthly returns. Contact us promptly if HMRC has raised a query.