What this letter usually means
A CIS letter from HMRC most often relates to a late monthly return. Contractors must file a CIS return each month by the 19th, reporting payments to subcontractors and the deductions taken. If the return is late, an automatic penalty applies, and it increases the longer the return remains outstanding.
Other CIS problems are not always a letter at all, but show up in the figures. These include the wrong deduction rate being applied, deductions taken on materials when they should only come from labour, and missing deduction statements that subcontractors need. Each of these can lead to overpaid tax or disputes, so it helps to understand them alongside the penalty rules.
Who it affects
CIS affects both sides of the construction payment chain. Contractors are responsible for verifying subcontractors, taking the right deductions, paying them over to HMRC and filing the monthly return on time. Subcontractors are affected because deductions are taken from their payments, and if the rate or treatment is wrong they can end up out of pocket until it is corrected.
Deductions are taken from labour only, not materials, at 20 percent for registered subcontractors or 30 percent where the subcontractor has not been verified. If you are owed money because too much was deducted, our pages on CIS refunds and how to claim a CIS refund explain the process in detail.
What you must not ignore
Please do not leave a CIS return unfiled in the hope it resolves itself. The penalties stack up at set points in time, so the cost of a missing return only grows. The key milestones to keep in mind are 1 day late, 2 months late, 6 months late and 12 months late.
Equally, do not ignore deduction problems. If the wrong rate has been used or deductions have been taken on materials, that money is usually recoverable, but only if the figures are corrected and the right claim is made. Subcontractors should also chase up any missing CIS deduction statements, because these are the evidence needed to reclaim what has been deducted.
What you may need to gather
Having the right paperwork to hand makes putting things right much quicker.
- The penalty notice and any reference numbers.
- The CIS return periods affected and their filing dates.
- Your CIS deduction statements showing what was taken.
- Invoices that separate labour from materials.
- Verification details and the deduction rate applied to each subcontractor.
- For a refund, your records of total deductions suffered in the year.
Keeping these organised through good bookkeeping means the labour and materials split is clear and the deduction figures can be checked at a glance.
What to do, step by step
Tackling it in this order keeps things under control.
- File any outstanding CIS return. Submitting a late return stops further penalties building at the later milestones.
- Check the deduction rate. Confirm whether 20 percent or 30 percent should have applied, based on verification.
- Review the labour and materials split. Make sure deductions were taken from labour only and not from materials.
- Issue or request statements. Contractors should provide CIS deduction statements; subcontractors should chase any that are missing.
- Correct any errors. Where the rate or treatment was wrong, put the figures right so the correct position is reported.
- Claim back any overpayment. A sole trader reclaims overpaid CIS through Self Assessment, while a company reclaims it through its payroll.
A worked example
These two short scenarios show a late return and a deduction error side by side.
A late return and a materials error
A contractor misses the 19th deadline for the monthly CIS return and files it once it is two months late. A penalty of £100 applied at 1 day late, and a further penalty of £200 applied at 2 months, so £300 is now due. Filing at that point stops the larger 6 month and 12 month penalties arising. Separately, a subcontractor is paid £2,000 for a job, of which £600 is materials and £1,400 is labour. The contractor mistakenly applies the 20 percent deduction to the full £2,000, taking £400, when it should only apply to the £1,400 of labour, which would be £280. The subcontractor has therefore suffered £120 more than they should have. Once the figures are corrected and the deduction statements are in order, that overpaid amount can be reclaimed, by a sole trader through Self Assessment or by a company through its payroll.
When to speak to an accountant
CIS can be fiddly, and the combination of deadlines, rates and the labour and materials split catches out many people. If you have a penalty, a deduction problem, or money you believe you are owed, an accountant can check the figures, file outstanding returns, correct mistakes and make sure any refund is claimed the right way for your business type.
We work with contractors and subcontractors across the UK and can take the stress out of CIS for you. To get things sorted, you can start your quote or book a call and we will guide you through it without any pressure.
A clear guide to CIS late return penalties and the deduction problems that catch out contractors and subcontractors.
Frequently asked questions
What are the penalties for a late CIS return?
A late monthly CIS return brings a £100 penalty at 1 day late and a further £200 at 2 months late. At 6 months and again at 12 months the penalty is the greater of £300 or 5 percent of the deductions on the return. Filing the return as soon as possible stops the later and larger penalties from arising.
Should CIS deductions be taken from materials?
No. CIS deductions are taken from labour only, not materials. A common mistake is applying the deduction to the whole invoice, including materials, which means too much is deducted. Splitting labour and materials clearly on invoices avoids this, and where it has happened the overpaid amount can usually be reclaimed.
What is the difference between the 20 percent and 30 percent rate?
Registered subcontractors who have been verified normally have deductions taken at 20 percent. Where a subcontractor has not been verified, the higher rate of 30 percent applies. Checking verification and applying the correct rate matters, because the wrong rate leads to either too much or too little being deducted.
How do I claim back overpaid CIS?
How you reclaim depends on your business type. A sole trader reclaims overpaid CIS through their Self Assessment tax return, where the deductions suffered are set against the tax due. A company reclaims it through its payroll. Our pages on CIS refunds explain both routes in more detail.
What if I am missing my CIS deduction statements?
CIS deduction statements are the evidence of what has been deducted from your payments, and you need them to reclaim the right amount. If any are missing, ask the contractor to provide them. Keeping a full set throughout the year makes claiming a refund far simpler and avoids delays.
Can a CIS penalty be appealed?
In some cases a CIS penalty can be appealed if there is a reasonable excuse for the late return. Keeping a clear record of what happened helps support any appeal. An accountant can review your situation, file what is outstanding and, where appropriate, help you put forward an appeal.