CIS Compliance Check: Verification, Deductions and Monthly Returns

A CIS compliance check examines whether a contractor has correctly operated the Construction Industry Scheme across verification, deduction and reporting obligations under Chapter 3 Part 3 FA 2004. HMRC typically reviews a sample of monthly returns and subcontractor records, comparing the deductions reported to HMRC with the deduction statements issued to subcontractors and the underlying payment records.

The check can also look at whether payments were correctly categorised, for example distinguishing materials from labour, since only the labour element of a payment is generally subject to CIS deduction. Misclassifying materials costs is a common source of both over-deduction and under-deduction errors.

Contractors must verify a subcontractor with HMRC before making the first payment under a new engagement, unless an exception applies, and HMRC will confirm the deduction rate to use, whether gross, standard or higher rate. A compliance check will test whether verification took place at the right time and whether the confirmed rate was actually applied.

Using an out-of-date deduction rate, or failing to reverify where required, is a frequent finding. HMRC will also check whether unverified subcontractors were paid at the higher deduction rate as the rules require, rather than an assumed standard rate.

Monthly returns must be filed by the statutory deadline and must accurately reflect payments made and deductions applied. Late returns attract automatic penalties that increase the longer the return remains outstanding, and inaccurate returns can attract further penalties depending on the behaviour that caused the error.

Where HMRC identifies a pattern of errors across several months, it may look back over a longer period to assess the scale of the issue, rather than treating each return in isolation. Correcting an identified error promptly, and reviewing whether the same mistake affected earlier returns, tends to produce a better outcome than addressing only the specific return HMRC has queried.

Gross payment status allows a subcontractor to be paid without deduction, subject to ongoing compliance, turnover and business tests. HMRC periodically reviews whether a business still meets these conditions, and a compliance check can prompt that review where other issues raise doubts about record-keeping or compliance history.

Losing gross payment status has an immediate cash flow effect, since future payments become subject to deduction. Businesses relying on gross status should keep filing and payment records current, since a pattern of late payments or returns is a common reason status is withdrawn.

Contractors should retain verification records, deduction statements issued, monthly return submissions and the underlying invoices or contracts supporting each payment. Records should be kept for the period required under the regulations, and HMRC can request them as part of a compliance check using its general information powers.

Poor record-keeping does not just risk a penalty for the record-keeping failure itself; it also makes it much harder to demonstrate that deductions were correctly calculated, which can lead HMRC to estimate a liability using the information it does hold, often to the contractor's disadvantage.

Verifying subcontractors promptly, applying the confirmed deduction rate consistently, and reconciling monthly returns to actual payments before submission all reduce the risk of errors accumulating unnoticed. Regularly reviewing subcontractor status, particularly where a subcontractor's own compliance position may have changed, also helps.

Where an error is found through internal review rather than an HMRC check, correcting it and notifying HMRC where appropriate is generally treated more favourably than waiting for HMRC to discover the same issue during a compliance check.