CIS3 October 2026 · 9 min read

HMRC Is Writing to CIS Contractors About Wrong Deduction Rates — Here's What to Do

HMRC is running a targeted campaign (August–December 2026) writing to CIS contractors about incorrect subcontractor deduction rates. Contractors have 45 days to check and fix errors before a full compliance check opens — with higher penalties for anything HMRC finds. Here's what the letter means and what to do now.

HMRC is writing to CIS contractors right now — here's what to do if you get a letter

HMRC is running a targeted contact campaign from August to December 2026, writing to CIS contractors where their records suggest the wrong deduction rate may have been applied to subcontractor payments. If you receive one of these letters, you have 45 days to check your records and put things right — after that, HMRC can open a full compliance check.

And here's the key point most builders miss: if you're a contractor, the liability for under-deducted CIS tax falls on you, not the subcontractor.

This isn't a routine mailshot. It's a prompted compliance campaign, which means any errors HMRC finds after the 45-day window are treated as "prompted" — and that carries significantly higher penalties than if you'd found and fixed the problem yourself.

Why HMRC is targeting CIS deduction rates now

The CIS requires contractors to deduct tax from subcontractor payments at the correct rate and pass it to HMRC. The three rates are:

| Subcontractor status | Deduction rate | |---|---| | Registered (verified with HMRC, paying tax through Self Assessment) | 20% | | Unregistered (not yet verified with HMRC) | 30% | | Gross payment status (passed HMRC compliance checks) | 0% (no deduction) |

It sounds simple, but in practice it goes wrong constantly. A subcontractor's status can change at any time — they might lose gross payment status, or their registration might lapse — and if the contractor doesn't re-verify and update their records, they'll be applying the wrong rate.

HMRC has identified a pattern of incorrect deductions across the sector and is now systematically writing to contractors where their data shows a mismatch.

How to know if you'll get a letter

HMRC is targeting contractors where their records show:

◢Subcontractors paid at 0% (gross) who have since lost gross payment status — the contractor should have switched to 20% deductions
◢Subcontractors paid at 20% who were never actually verified — they should have been verified before first payment, and may actually be at 30%
◢Deduction rates that don't match HMRC's verification records — for example, the contractor deducted 20% but HMRC's last verification said 30%

If any of these apply to you — even if you haven't received a letter yet — you should act now rather than wait.

The 45-day clock: what to do when the letter arrives

When you receive the letter, the clock starts. Here's what to do:

1. Don't ignore it

This is the single most expensive mistake. The letter is not a warning shot — it's the first step in a compliance process. Ignoring it doesn't make it go away; it just means any errors are found by HMRC rather than by you, which pushes you into the prompted penalty category.

2. Check every subcontractor you've paid in the last 12 months

Go through your CIS300 returns for the past 12 months. For each subcontractor, check:

◢Were they verified with HMRC before you first paid them? If not, the 30% rate should have applied.
◢Has their status changed since you verified them? HMRC gives contractors 35 days' notice when a subcontractor's status changes (for example, from gross to 20%). If you missed that notice, you may have been deducting at the wrong rate.
◢Does the rate you applied match the rate HMRC gave you at verification? Pull up your verification confirmation and compare.

3. Re-verify any subcontractors you're unsure about

You can verify a subcontractor at any time through HMRC's CIS Online service. It takes minutes and gives you a current verification number and deduction rate. If the rate has changed since you last verified, you need to update your records and apply the new rate from your next payment.

4. Amend any incorrect returns

If you find that you applied the wrong deduction rate, you must amend the affected CIS300 returns. You can do this through HMRC's CIS Online service or your CIS software. Each amended return corrects the deduction figures for that month.

5. Get professional advice before responding

If you find errors — especially significant ones across multiple months — talk to a construction accountant before you do anything else. They can help you:

◢Calculate exactly how much was under-deducted
◢Amend returns correctly
◢Make a voluntary disclosure to HMRC, which can significantly reduce penalties
◢Navigate the offset mechanism (see below)

What happens if you don't act within 45 days

After the 45-day window closes, HMRC can open a full compliance check. If they find errors:

◢Penalties are higher. Because the campaign letter prompted you to check, any errors found by HMRC after the deadline are treated as "prompted" behaviour. Penalties for prompted inaccuracies can range from 15% to 100% of the under-deducted tax, depending on whether the error was careless or deliberate.
◢Interest accrues on the under-deducted amount from the original due date.
◢You bear the cost. The contractor is legally responsible for the correct deduction. If you under-deducted, HMRC will recover the shortfall from you — not the subcontractor.

The offset mechanism — and why it's not a safety net

There is a mechanism (under Regulation 9 of the CIS Regulations 2005) that allows HMRC to redirect the liability to the subcontractor in certain circumstances — for instance, where the subcontractor has already declared the income and paid the tax through their Self Assessment. HMRC can issue a "direction" that relieves the contractor of the liability.

But here's the catch: the direction is not automatic. The contractor has to apply for it, the subcontractor has to have already accounted for the tax, and the process can take months. In the meantime, the contractor is still on the hook.

Don't rely on the offset. Get the deductions right in the first place.

Common scenarios that trigger the wrong rate

Scenario 1: Gross payment status lost

A bricklayer had gross payment status (0% deduction) for years. HMRC revoked it because they filed their VAT returns late (VAT compliance has been part of the gross payment status tests since April 2024). HMRC sent you 35 days' notice, but it went to an old address or got buried in the accounts inbox. You kept paying them gross.

Result: Every payment after the 35-day notice period should have had 20% deducted. You're now liable for the under-deducted tax on all those payments.

Scenario 2: Never verified

You took on a new plasterer. You knew them from a previous job and assumed they were registered. You deducted 20%. But you never verified them with HMRC — and they weren't actually registered.

Result: The correct rate was 30% (unregistered subcontractor). You under-deducted by 10% on every payment.

Scenario 3: Verification expired

You verified a subcontractor three years ago and haven't checked since. Their circumstances changed — they deregistered from Self Assessment, or their gross payment status lapsed — and you've been applying the old rate.

Result: HMRC's view is that verification is valid until you're told otherwise, but if HMRC wrote to you about a status change and you didn't act, the liability is yours.

How to stop this happening again

◢Verify every subcontractor before the first payment. No exceptions — even if you've worked with them before. The verification gives you the current rate and a verification number.
◢Re-verify periodically. There's no legal requirement to re-verify, but doing it every 6–12 months for long-term subcontractors means you'll catch status changes early.
◢Watch for HMRC status change notices. These come by post and through your CIS Online account. Make sure your contact details with HMRC are current.
◢Use CIS software that flags status changes. Most commercial CIS tools can alert you when a subcontractor's verification is approaching its review date or when HMRC has notified a change.
◢Keep verification records. Hold on to verification numbers and the rates HMRC confirmed. If HMRC queries a deduction, you need to prove you verified at the correct rate at the time.

What you should do right now

Whether or not you've received a letter:

◢Pull your last 12 months of CIS300 returns. Check that every subcontractor was verified and that the deduction rate matches what HMRC told you.
◢Re-verify any subcontractor you haven't checked in the last year. It takes two minutes per subcontractor through CIS Online.
◢If you find errors, amend your returns and make a voluntary disclosure. The earlier you act, the lower the penalty exposure.
◢If you've received a letter, don't wait. The 45-day window is short and the consequences of missing it are serious.

Need help checking your CIS records?

If you've received an HMRC campaign letter — or you just want to check whether your CIS deductions have been correct — London Construction Accountants offers a free CIS compliance check. We'll review your last 12 months of returns, verify every subcontractor against current HMRC records, flag any errors, and help you put them right before HMRC does.

Book your free CIS review — 45 days goes fast.

This article is for general guidance only and does not constitute formal tax advice. Rates, thresholds and deadlines change — always confirm the current position with a qualified accountant.