Top 5 CIS Payroll Mistakes and How to Avoid Them

The UK’s Construction Industry Scheme (CIS) is designed to regulate tax payments for subcontractors, yet it remains one of the most misunderstood and misapplied areas in construction finance. While the CIS system can be a valuable tool for increasing efficiency and flexibility, when managed poorly, it can expose your business to serious HMRC penalties, reputational risk, and costly backdated liabilities.

Whether you’re a main contractor or a subcontractor-heavy firm, this guide will walk you through the top 5 most common CIS payroll mistakes and exactly how to avoid them.

Mistake 1: Misclassifying Workers as Subcontractors

One of the most common and dangerous mistakes is treating someone as a CIS subcontractor when, in HMRC’s eyes, they should be classified as a PAYE employee.

Why It’s a Problem:

• HMRC considers control, substitution, and financial risk when determining status.
• Misclassification can lead to backdated PAYE and NIC payments, interest, and penalties.
• If your subcontractor has no other clients, uses your equipment, and takes no financial risk, HMRC could deem them “disguised employees.”

How to Avoid It:

• Use HMRC’s CEST tool as a starting point, but don’t rely on it alone.
• Conduct thorough employment status assessments for every worker.
• Keep a documented audit trail to support your classification decisions.

Mistake 2: Failing to Verify Subcontractors with HMRC

Before paying any subcontractor under the CIS, you must verify them with HMRC to determine their correct deduction rate.

Why It’s a Problem:

• Failure to verify means you must deduct tax at 30%, even if they’re registered.
• You risk fines for non-compliance, incorrect deductions, or being unable to claim tax credits.

How to Avoid It:

• Implement a system that automatically verifies new subcontractors through HMRC before their first payment.
• Record UTR (Unique Taxpayer Reference) numbers, NI numbers, and company details during onboarding.

Mistake 3: Treating CIS Subcontractors Like Employees

Even if subcontractors are correctly registered for CIS, if your day-to-day working practices mirror those of PAYE employees, you could still be non-compliant.

Why It’s a Problem:

• HMRC looks at what happens in practice, not just what’s in the contract.
• Examples include: fixed working hours, company-branded PPE, paid holidays, or being managed like a full-time employee.

How to Avoid It:

• Ensure subcontractors have autonomy over how and when they work.
• Avoid providing tools, vehicles, or requiring attendance at internal staff meetings.
• Have clear, signed “contracts for services”, not employment contracts.

Mistake 4: Missing or Inaccurate CIS Monthly Returns

Every contractor under CIS must file a monthly return to HMRC by the 19th of the following month.

Why It’s a Problem:

• Late or incorrect filings can lead to automatic penalties, starting at £100 and increasing monthly.
• Inaccuracies may trigger an HMRC investigation into your wider tax and employment practices.

How to Avoid It:

• Use CIS payroll software or a specialist provider (like Subby) that manages CIS returns automatically.
• Keep detailed digital records of deductions, statements, and verifications.

Mistake 5: Assuming Your Accountant Has It Covered

Many construction firms rely on their general accountant to manage CIS—but most aren’t CIS specialists, and may overlook critical compliance nuances.

Why It’s a Problem:

• We’ve seen firms penalised even though “the accountant handled it.”
• Accountants may not conduct on-site assessments or review working practices in line with employment status rules.

How to Avoid It:

• Engage a provider with construction-specific CIS and employment status expertise.
• Get dedicated compliance support from professionals who understand HMRC expectations—and how to protect your business.

Need Help Avoiding These Mistakes? At Subby, we specialise in CIS payroll and compliance for construction firms. We don’t just process payments, we protect your business.