Industry guidance
HMRC Enquiry Help for Construction and CIS
Guidance for construction businesses and subcontractors facing HMRC enquiries into CIS deductions, employment status and VAT.
At a glance
- CIS, employment status and VAT are often examined together in a single construction sector enquiry
- HMRC looks at how work is actually controlled and supervised, not just what contracts say
- The VAT domestic reverse charge changes who accounts for VAT on many construction services
- Getting subcontractor status wrong across a workforce can create a large cumulative liability
- CIS generally applies to UK construction operations regardless of where a business is based
- Public sector contracts can carry their own compliance checks separate from HMRC enquiries
Construction businesses sit at the intersection of several HMRC compliance regimes at once — CIS deductions on subcontractor payments, employment status questions about who is genuinely self-employed, VAT treatment of different types of building work, and the VAT domestic reverse charge for construction services. An enquiry into a construction business often starts with CIS verification and monthly return records, checking that subcontractors were verified correctly and that deductions at 0%, 20% or 30% were applied based on their actual status.
Employment status is a particularly common flashpoint, since HMRC will look past written contracts to how work is actually controlled, supervised and paid for in practice. Where a business also does mixed commercial and residential work, VAT liability and the reverse charge rules add another layer of complexity that HMRC may probe alongside CIS. Getting subcontractor status wrong across a large workforce can create a significant cumulative liability, which is why construction sector enquiries are often broader in scope than they first appear.
Where HMRC identifies inconsistencies in CIS verification or deduction rates, the review often extends into checking whether the deduction rate applied for each subcontractor matched their actual registration status at the time of payment, since rates can change if a subcontractor's compliance history changes. Retentions held back from subcontractor payments until practical completion also need consistent treatment, since the timing of when retentions are recognised for tax purposes can itself become a point of dispute.
International and cross-border construction work adds a further layer where subcontractors or main contractors operate across UK borders, since CIS generally applies to construction operations carried out in the UK regardless of where a business is based, and getting the territorial scope wrong can leave deductions missed on payments that should have been within CIS. Businesses working on public sector contracts should also be aware that additional compliance checks are sometimes built into procurement processes themselves, independent of any HMRC enquiry.
Tax areas most relevant to construction and cis
- CIS verification and deduction rates
- Employment status of subcontractors
- VAT domestic reverse charge for construction services
- VAT liability on mixed commercial/residential projects
- Corporation Tax treatment of retentions and work in progress
- Territorial scope of CIS for cross-border construction work
- Public sector procurement compliance requirements
How to prepare
A structured, evidence-led approach from the outset tends to produce a faster and less stressful outcome than responding to each request as it comes in.
- 1
Confirm each subcontractor's verification status and deduction rate at the time of payment
- 2
Reconcile CIS300 monthly returns against actual payments made
- 3
Review employment status factors for each subcontractor relationship
- 4
Check VAT reverse charge treatment has been applied to the correct supplies
- 5
Gather retention records and confirm consistent tax treatment
- 6
Confirm whether CIS applies to any cross-border subcontractor arrangements
- 7
Check any public sector procurement compliance requirements alongside standard CIS obligations
What documentation to gather
- CIS subcontractor verification records and monthly CIS300 returns
- Contracts and working arrangements for all subcontractors engaged
- VAT records showing treatment of reverse charge and standard-rated work
- Evidence of how subcontractor work is supervised and controlled in practice
- Retention and work-in-progress records for ongoing contracts
- Records confirming the territorial scope of any cross-border subcontractor arrangements
- Procurement compliance documentation for any public sector contracts held
Common mistakes to avoid
These are the errors we see most frequently in this sector — being aware of them in advance can help you avoid an entirely preventable dispute with HMRC.
Applying the wrong CIS deduction rate because verification wasn't re-checked when a subcontractor's status changed
Treating a subcontractor as self-employed based only on the written contract, ignoring how work is actually carried out
Applying standard VAT instead of the reverse charge to qualifying construction services, or vice versa
Inconsistent treatment of retentions between different contracts
Not reconciling CIS300 returns regularly against actual subcontractor payments
Assuming CIS doesn't apply to overseas-based subcontractors working on UK construction operations
Overlooking procurement-specific compliance checks that apply to public sector contracts
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What happens next
Knowing the typical sequence of events helps you feel more in control and know roughly what to expect at each stage.
HMRC reviews CIS verification records and deduction rates against monthly returns
Employment status is assessed for a sample of subcontractor relationships
VAT reverse charge treatment is checked against the type of supply made
Any errors identified are quantified across the relevant period
A settlement is agreed covering additional CIS, VAT, or PAYE liabilities plus interest
Cross-border CIS arrangements are checked against the territorial scope rules that actually apply
Public sector contract compliance may be reviewed alongside, but separately from, any HMRC enquiry
Frequently asked questions
The questions we're asked most often by businesses in this sector, answered in plain English.
How does the VAT domestic reverse charge affect construction businesses?
For most business-to-business construction services, the customer accounts for VAT instead of the supplier, rather than the supplier charging VAT on the invoice. Getting this wrong is a common area HMRC checks.
What makes a subcontractor genuinely self-employed under CIS?
HMRC looks at factors like whether the person controls how the work is done, whether they can send a substitute, and whether they bear financial risk, rather than relying solely on what a contract states.
Can CIS deductions be reclaimed?
Subcontractors who are limited companies can offset CIS deductions against their PAYE/NI liabilities, and sole traders reconcile deductions through their Self Assessment return.
What happens if I apply the wrong CIS deduction rate?
HMRC can assess the shortfall between the rate that should have applied and what was actually deducted, so it's worth re-verifying subcontractors periodically rather than relying on a one-off check.
How are retentions treated for tax purposes?
This depends on the specific contract terms and accounting policy applied, but consistency matters, since HMRC will check that retentions are recognised in a consistent and defensible way across contracts.
Can a genuine mistake with CIS still result in a penalty?
It can, though penalties are generally more significant where errors are careless or deliberate rather than a one-off genuine mistake, particularly if corrected proactively.
Does CIS apply to subcontractors based outside the UK?
It can, since CIS generally focuses on where the construction operations take place rather than where the business is based, so UK-based projects can still fall within CIS regardless of a subcontractor's location.
What counts as construction operations under CIS?
A broad range of activities including construction, alteration, repair and demolition of buildings and structures, though certain professional services like architecture are generally excluded.
Do public sector construction contracts have extra compliance requirements?
Often yes, with procurement processes sometimes including their own tax compliance checks independent of anything HMRC does directly.
Can a construction business be both a contractor and subcontractor under CIS?
Yes, many businesses operate in both roles simultaneously, verifying subcontractors they engage while also being verified by contractors who engage them.
What happens if a subcontractor doesn't provide their UTR for verification?
Without proper verification, the higher 30% deduction rate generally applies until the subcontractor's status can be confirmed with HMRC.
Do materials costs need CIS deducted from them?
Generally no — CIS deductions apply to the labour element of a payment, so genuine, evidenced materials costs can usually be excluded from the calculation.
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