Construction CIS and VAT health check

Pull the last twelve monthly CIS returns and lay them next to your subcontractor payment records. The tax month runs from the 6th of one month to the 5th of the next, and the return is due by the 19th. That mismatch with calendar months is where a lot of errors begin, because bookkeeping is usually done to month end and the return is not.

What to compare

• Gross payment per subcontractor on the return against the payment that actually left the bank.
• Materials split out correctly, since deduction applies to labour only.
• VAT excluded from the figure you deduct from.
• The deduction rate applied: standard, higher, or gross, matched to the verification result.
• Payment and deduction statements issued to each subcontractor for every month.

Where the drift shows up

The common pattern is a subcontractor verified once, years ago, whose status later changed. The contractor carried on deducting at the old rate. Another is an invoice that includes plant hire or materials bought by the subcontractor, where the whole invoice has been treated as labour. Both overstate the deduction, which means you have handed HMRC money that belonged to the subcontractor, and the subcontractor is chasing you for it.

Under-deduction is worse. If you deducted nothing from an unverified subcontractor, HMRC can look for the tax that should have been deducted from you, not from them. Twelve months of that on a few regular workers builds into a real number.

Check the filing history too. Late returns carry a fixed penalty from day one, rising at two months, six months and twelve months. Those penalties accumulate quietly on the HMRC account.

This is the step most companies skip, and it is the step that finds money. Your CIS returns create a liability on your PAYE and CIS account at HMRC. Your payments reduce it. If the returns were wrong, or if a payment was allocated to the wrong tax month or the wrong reference, the account and your records stop agreeing.

What to look at in the portal

• The balance by tax month, not just the headline balance.
• Payments made and which period HMRC allocated them to.
• Any specified charges HMRC has raised where a return was not filed.
• Interest and penalties sitting on the account.
• For your own company as a subcontractor, CIS suffered and whether it has been offset against PAYE liabilities properly.

The offset trap for limited companies

If your company has CIS deducted by a main contractor, you reclaim it through the employer payment summary against your PAYE, National Insurance and CIS liabilities. If the EPS was never filed, or filed with the wrong figures, the credit never lands. You keep paying PAYE in full while HMRC holds the CIS deductions that should have covered it. That is exactly how a company ends up borrowing to cover costs while its own cash sits in a government account.

Any surplus at the end of the tax year can be repaid or set against corporation tax, but only once the figures are right and the claim is made. It does not happen automatically.

The VAT domestic reverse charge applies to most standard rated and reduced rated construction services between VAT registered businesses where the supply is reported under CIS. The supplier does not charge VAT. The customer accounts for it as both output tax and input tax on their own return.

Work that falls inside it

The list mirrors CIS construction operations: building, altering, repairing, extending, demolishing or dismantling structures; walls, roadworks, power lines, pipelines, sewers, docks and runways; installing heating, lighting, ventilation, drainage, water supply and fire protection systems; painting and decorating; and the preparatory and finishing work around those jobs, including site clearance, excavation, foundations, scaffolding, landscaping and access roads. Internal cleaning counts where it forms part of construction, alteration, repair or restoration.

Work that falls outside it

Staff supplied by an employment business is excluded, even though the work itself would otherwise qualify. So is drilling for oil or gas, mineral extraction, and certain tunnelling or boring supplied on their own. Supplies to an end user or an intermediary supplier are also outside it, provided they have confirmed their status to you in writing.

The two failure modes

Charging VAT on a reverse charge supply means your customer cannot reclaim it and you have collected tax you should not have. Applying the reverse charge where it does not belong, usually on an end user job, means you have under-declared output tax. Both show up as a difference between your sales ledger and your VAT return, so run a sample of ten invoices across different customer types and trace each one through to the return.

Three changes announced at Autumn Budget 2025 take effect from 6 April 2026, and they tighten the scheme in ways that matter to anyone running a health check now.

Nil returns come back

The requirement to file a nil CIS return, removed in 2015, is reinstated. If you pay no subcontractors in a tax month, you file a nil return or you tell HMRC in advance that you expect no payments. Otherwise a penalty follows. Companies with seasonal work or long gaps between contracts are the ones most likely to be caught.

Gross payment status can be withdrawn mid-year

HMRC gains the power to cancel gross payment status immediately where a business knew or should have known a transaction was connected to fraudulent evasion of tax. Where status is cancelled on those grounds, the wait before reapplying goes from one year to five, as HMRC’s guidance on tackling construction industry scheme fraud explains. For a company whose cash flow depends on being paid gross, that is a material risk.

Liability can follow the director

A business that knew or should have known it was part of a fraud-connected transaction becomes liable for the tax lost, with a penalty of up to 30 per cent of the amount HMRC determines. That penalty can be charged on the company or jointly with a company officer, including a director, where their actions gave rise to the liability.

The phrase to pay attention to is “should have known”. HMRC does not have to prove you knew. It has to show that a reasonable business in your position, with the information available to you, would have spotted the connection. Keeping verification records, checking who you are actually dealing with, and asking questions when a labour supplier’s pricing looks impossible are now part of your compliance file. Payments to local authorities and public bodies also move outside CIS scope from the same date.

A health check is only as good as the paperwork behind it. If HMRC opens a review, the documents either support what you filed or they do not.

Keep and be able to produce

• Verification references for every subcontractor, with the date and the rate HMRC returned.
• Contracts or written terms showing the work is construction and who the parties are.
• Subcontractor invoices with materials and labour separated, and VAT treated correctly.
• Monthly payment and deduction statements issued, with proof of issue.
• Written confirmation from any customer claiming end user or intermediary supplier status for VAT.
• Evidence of checks on new labour suppliers, particularly agencies and new entities.

Employment status

CIS deduction is not a substitute for deciding whether someone is employed or self-employed. If a worker is under your control, uses your materials, works set hours and bears no financial risk, HMRC may treat them as an employee regardless of the CIS deduction, with PAYE and National Insurance due. On larger sites this question tends to arrive alongside a CIS review.

Retentions

Retentions held back from subcontractors still form part of the payment when they are released, and the deduction applies then. Retentions sitting in your ledger for two years, released without a CIS return entry, are a recurring finding.