Why subcontractors overpay HMRC every year
The Construction Industry Scheme is designed to collect tax in advance. A contractor deducts a percentage from your labour payments and passes it to HMRC as a payment on account against your eventual tax and National Insurance. The problem is that the deduction takes no account of your expenses, your personal allowance or the materials you have bought. It just takes a flat percentage off the labour element and hands it over. For most subcontractors that means overpaying, often by more than they realise, across every year they work in construction.
The six mistakes below are where that overpayment is most commonly made worse. Each one has a worked cost figure so you can see what the gap is in real money. If any of them apply to your situation, the same section explains what to do about it.
Mistake 1: staying unregistered and suffering 30% instead of 20%
CIS registration for a subcontractor is optional in law. In practice it costs you an extra 10 percentage points on every payment you receive from a contractor if you skip it.
For 2026/27 the deduction rates are as follows.
- Unregistered: 30% deducted from your labour income
- Registered: 20% deducted from your labour income
- Gross payment status: 0% deducted
The worked cost is straightforward. On £40,000 gross labour for the year, an unregistered subcontractor has £12,000 deducted and passed to HMRC. A registered subcontractor has £8,000 deducted. The difference is £4,000 a year sitting with HMRC rather than in your bank account while you wait for the Self Assessment cycle to complete. You get it back eventually, but waiting 12 to 18 months for your own money is a real cost.
Registration is free and takes minutes via HMRC. There is no income threshold, no approval period and no downside. For anyone currently unregistered, this is the single quickest fix on the list. Our guide to CIS deduction rates explained covers the registration process in more detail.
Mistake 2: not splitting labour and materials correctly
CIS deductions apply to the labour element of a payment only. The cost of materials you buy for the job is excluded from the deduction base entirely. This rule is clear in HMRC guidance, but it is one of the most frequently misapplied in practice.
If a contractor applies the 20% deduction to your full invoice rather than to the labour element alone, they are over-deducting. On a £5,000 job made up of £3,000 labour and £2,000 materials, the correct deduction is £600 (20% of £3,000). If the contractor deducts on the full £5,000, the deduction is £1,000. That is £400 over-deducted on a single job.
Across a full year of similar jobs the figure compounds quickly. The fix is to itemise every invoice with a clear labour and materials split. Keep receipts for all materials purchased. If you are seeing deductions applied to the full invoice value, raise it directly with the contractor and ask them to correct the basis. Any over-deduction from previous years can be reclaimed through your Self Assessment return, but preventing it at source is cleaner and faster.
Mistake 3: missing allowable expenses on the Self Assessment return
Because CIS deductions are taken before any expenses are accounted for, the Self Assessment return is where subcontractors recover the tax on costs that are wholly and exclusively for the business. Claiming expenses fully is not optional: leaving them off means paying tax on income you never actually had available to you.
The most commonly missed expenses for a sole-trader subcontractor are van or vehicle costs, mileage, tools and equipment, protective clothing, insurance, accountancy fees and phone costs.
To put a number on it, consider a modest example. A subcontractor uses a van that costs £3,000 a year to run for the business (insurance, tax, servicing, fuel on eligible trips), and drives 10,000 business miles in the year. At the HMRC mileage rate of 55p per mile for 2026/27 (up from 45p under FA 2026), those miles alone are worth £5,500 in deductible expenses. Add the van running costs and the total allowable deduction is £8,500. At the 20% basic rate, claiming those expenses rather than missing them saves £1,700 in income tax. Even on the mileage alone, the saving is £1,100.
Subcontractors who file their own returns without professional support very often miss a significant proportion of this. A specialist construction accountant typically recovers far more in additional expenses than their fee costs. Our guide to allowable expenses for CIS subcontractors covers every category in detail. If you want to estimate how much you might be owed before you commit to anything, the CIS refund estimator runs the numbers based on your income and circumstances.
Mistake 4: filing Self Assessment late or not at all
Every CIS subcontractor who receives income from which deductions have been made needs to file a Self Assessment return to reclaim any overpayment. A surprisingly large number either file late or do not file at all, at which point two things happen: penalties accumulate, and the refund goes unclaimed.
The automatic penalty for missing the 31 January online deadline is £100 from day one, regardless of whether any tax is owed. The penalties escalate from there: a daily £10 charge after 3 months, then a further £300 or 5% of the tax due after 6 months, then another £300 or 5% of the tax due after 12 months (the 100% rate applies only where the failure is deliberate and concealed, not to an ordinary late return). These are separate from the penalties on the CIS300 contractor return, and they stack up quickly on a missed year.
The bigger cost is usually the unclaimed refund. Based on market figures from CIS-specialist firms, the average annual refund for a registered CIS subcontractor is in the range of £2,000 to £3,000 (that figure is illustrative and not guaranteed for any individual). A subcontractor who does not file simply leaves that money with HMRC. The combination of a £100 penalty and a £2,000 refund untouched is a £2,100 annual cost of inaction.
HMRC allows refund claims for up to 4 prior tax years, so filing late still recovers something, but years outside that window are gone permanently. Filing on time, with a complete expenses schedule, is the only way to capture the full amount.
Mistake 5: not applying for gross payment status
Gross payment status (GPS) is the top tier of CIS registration. A subcontractor who holds it is paid in full with a 0% deduction rather than 20%. The tax is still due, settled through Self Assessment or Corporation Tax at the year end, but nothing is taken at source month by month.
To qualify, a sole trader needs net CIS turnover of at least £30,000 over the past 12 months (labour only, excluding VAT and materials), a clean 12-month compliance record (no late returns, no overdue tax), and a bank account in the name of the business. The turnover threshold is higher for partnerships and limited companies but the principle is the same.
The cash-flow value is significant. A subcontractor with £45,000 net CIS income on the 20% rate has £9,000 deducted at source across the year. With GPS that £9,000 stays in their account throughout, funding costs as they arise rather than sitting with HMRC waiting to be reclaimed. For a business that pays for materials, tools, insurance and van costs out of cash flow, that is a meaningful working-capital difference.
For many subcontractors who have been registered for a couple of years and have a clean filing history, GPS is within reach and simply has not been applied for. From 6 April 2026 there are tougher rules around keeping it (Finance Act 2026 allows HMRC to revoke GPS immediately where a contractor knew or should have known about supply-chain fraud, and a 5-year reapplication ban now applies on fraud grounds), but for a subcontractor working direct with legitimate contractors, those rules are not a barrier to applying. Our GPS eligibility checker can confirm within minutes whether you are likely to qualify.
Mistake 6: not claiming back years
HMRC allows Self Assessment refund claims for up to 4 prior tax years. For a subcontractor who has been paying 20% CIS deductions, working with minimal expenses claimed and filing returns that missed large portions of their allowable costs, there may be several years of significant overpayments sitting unclaimed.
The worked figure is straightforward. If a subcontractor was owed an average of £2,000 a year in refunds but never filed, or filed without full expenses, across 3 years, that is £6,000 left with HMRC. Within the 4-year window, amended or initial returns for those years can still be filed and the money recovered. Outside that window, it cannot.
The priority is to act before years fall out of the window. The 2022/23 tax year closes to claims on 5 April 2027. A subcontractor who has never properly reclaimed their CIS overpayments should address the earliest open year first. Our guide to claiming CIS refunds for back years walks through the process, and the CIS refund estimator gives a starting estimate of what may be recoverable before any work begins.
What the six mistakes cost, and how to fix them
| Mistake | Typical annual cost | How to fix it |
|---|---|---|
| Staying unregistered (30% vs 20%) | ~£4,000 extra withheld on £40,000 gross labour | Register for CIS via HMRC online service; takes minutes and is free |
| Not splitting labour and materials correctly | ~£400 over-deducted per £5,000 job with £2,000 materials | Itemise every invoice with a clear labour/materials split; reclaim over-deductions through SA |
| Missing allowable expenses on SA return | ~£1,100 overpaid (mileage alone at 55p/10,000 miles) | Claim van costs, mileage at 55p/mile, tools, insurance and all eligible expenses each year |
| Filing SA late or not at all | £100 auto-penalty plus ~£2,000 refund untouched | File by 31 January each year with a complete expenses schedule; use a specialist if needed |
| Not applying for gross payment status | ~£9,000/year cash flow on £45,000 net CIS income | Check eligibility (£30,000 net turnover + clean compliance) and apply via HMRC or your accountant |
| Not claiming back years | ~£6,000 unclaimed over 3 years at £2,000/year average | File or amend returns for up to 4 prior tax years before the windows close |
The common thread
All six mistakes share the same root: the CIS system collects tax in advance, on a flat-rate basis, without any account taken of your actual costs or entitlements. Every mechanism for putting that right, registration, correct invoice splitting, expenses claims, GPS, back-year refunds, requires you to take a positive step. The scheme does not automatically correct itself in your favour.
For a subcontractor who has never had specialist support, addressing all six in a single tax year can produce a material cash recovery. For most people the starting point is understanding what refund they may already be owed. The CIS refund estimator gives a working estimate based on your income, deductions and expenses profile. If GPS eligibility is the question, the GPS eligibility checker covers the three qualifying tests directly.
If you want to work through all of this with a specialist rather than piece it together yourself, our team handles CIS refunds, back-year claims, GPS applications and ongoing compliance for subcontractors across the UK. You can see the full range on our services page or start with a specific question on our contact page.