The Construction Industry Scheme (CIS) is a vital part of the UK construction sector, designed to ensure that contractors and subcontractors pay the correct amount of tax to HMRC. While CIS payroll helps maintain transparency and compliance, it is also an area where mistakes are common. Even small errors can result in HMRC penalties, delayed payments, and damaged relationships with subcontractors.

For contractors and construction businesses, understanding these common CIS payroll mistakes and knowing how to avoid them is essential. This guide explains the most frequent errors seen in CIS payroll, the risks they carry, and practical steps to stay compliant and penalty-free.

Misclassifying Workers as Subcontractors or Employees

One of the most common CIS payroll mistakes is incorrectly classifying workers. Not everyone working on a construction project should be treated as a CIS subcontractor. Some workers may legally be employees and should be paid through PAYE instead.

Misclassification often happens when businesses assume that anyone providing services on a site can fall under CIS. HMRC looks closely at employment status, considering factors such as control, substitution, and mutuality of obligation. If HMRC determines that a worker has been wrongly treated as a subcontractor, the contractor may be liable for unpaid tax, National Insurance contributions, interest, and penalties.

To avoid this mistake, contractors should carry out proper employment status assessments before onboarding workers. Using HMRC’s employment status guidelines and seeking professional payroll advice can significantly reduce the risk of misclassification.

Failing to Verify Subcontractors with HMRC

Under CIS rules, contractors must verify all new subcontractors with HMRC before making any payments. This verification process confirms whether the subcontractor is registered for CIS and determines the correct deduction rate, which may be 0%, 20%, or 30%.

A common mistake is paying subcontractors without verification or assuming previous verification is still valid. If a subcontractor is not verified, HMRC may require the contractor to apply the higher 30% deduction rate, and failure to do so can lead to penalties.

The best way to avoid this issue is to make verification a standard part of your onboarding process. Professional CIS payroll services, such as those provided by The Infinity Group, can handle subcontractor verification efficiently and ensure the correct deduction rates are applied from the start.

Applying Incorrect CIS Deduction Rates

Applying the wrong CIS deduction rate is another frequent error. Some subcontractors qualify for gross payment status, meaning no tax should be deducted. Others should have 20% deducted, while unverified subcontractors require a 30% deduction.

Mistakes often occur when contractors rely on outdated information or fail to update records after a subcontractor’s status changes. Applying the wrong rate can result in underpaid tax, which HMRC will pursue from the contractor, not the subcontractor.

To prevent this, contractors should regularly review subcontractor records and ensure deduction rates are based on current HMRC verification results. Accurate record-keeping and automated CIS payroll systems help minimise these errors.

Incorrect Calculation of CIS Deductions

CIS deductions should only be calculated on labour costs, not on materials, VAT, or certain allowable expenses. A common mistake is deducting tax from the total invoice value, including materials, which leads to over-deductions and disputes with subcontractors.

On the other hand, failing to deduct tax from eligible labour costs can result in underpaid tax and HMRC penalties. Both scenarios create unnecessary administrative work and strain professional relationships.

To avoid incorrect calculations, contractors should ensure invoices clearly separate labour and material costs. Using experienced CIS payroll providers like The Infinity Group ensures deductions are calculated correctly in line with HMRC rules.

Missing CIS Monthly Return Deadlines

Contractors must submit CIS monthly returns to HMRC by the 19th of each month, even if no payments were made during that period. A common mistake is assuming that no activity means no return is required.

Late or missing CIS returns can lead to automatic penalties, starting at £100 and increasing the longer the delay continues. Repeated late submissions can also trigger HMRC compliance checks.

The simplest way to avoid missed deadlines is to maintain a clear payroll calendar and set reminders. Many contractors choose to outsource CIS payroll to ensure monthly returns are submitted accurately and on time.

Failing to Provide Payment and Deduction Statements

Contractors are required to give subcontractors a payment and deduction statement each time they are paid. These statements show the gross amount, labour cost, CIS deductions, and net payment.

Failing to provide these statements or issuing incomplete ones is a common compliance issue. Subcontractors rely on these documents to complete their own tax returns, and HMRC may penalise contractors for not issuing them correctly.

Using structured CIS payroll processes ensures that payment statements are generated automatically and provided to subcontractors promptly.

Poor Record-Keeping

HMRC requires contractors to keep CIS records for at least three years. These records include subcontractor details, verification results, invoices, payment dates, and deduction amounts.

Poor record-keeping is a major risk factor during HMRC inspections. Missing or inaccurate records can result in penalties even if the payroll calculations themselves were correct.

To avoid this, contractors should maintain organised digital records and regularly review their CIS documentation. Outsourced payroll services, such as those offered by The Infinity Group, help ensure records are stored securely and meet HMRC requirements.

Not Registering for CIS on Time

Some contractors begin construction work without registering for CIS, assuming they can do so later. This is a costly mistake. If HMRC discovers that a business should have been registered earlier, it may issue penalties and require backdated returns.

Contractors should register for CIS as soon as they start taking on construction work or paying subcontractors. Early registration avoids compliance issues and demonstrates good faith to HMRC.

Ignoring Changes in CIS Rules

CIS regulations can evolve, and failing to keep up with changes is another common mistake. Updates may affect reporting requirements, verification processes, or compliance expectations.

Relying on outdated practices increases the risk of errors and penalties. Staying informed through HMRC updates or working with a specialist CIS payroll provider helps contractors adapt to changes quickly and accurately.

How to Avoid HMRC Penalties with the Right CIS Payroll Support

Avoiding CIS payroll mistakes requires attention to detail, strong processes, and up-to-date knowledge of HMRC regulations. For many contractors, managing this internally can be time-consuming and stressful, particularly as their business grows.

Working with a specialist provider like The Infinity Group allows contractors to reduce risk, save time, and maintain full compliance. With expert handling of subcontractor verification, deduction calculations, monthly returns, and record-keeping, businesses can focus on running projects rather than worrying about payroll errors.

In the UK construction industry, CIS compliance is not optional. By understanding common mistakes and taking proactive steps to avoid them, contractors can protect their business from HMRC penalties, maintain trust with subcontractors, and operate with confidence in an increasingly regulated environment.