If you pay subcontractors under the Construction Industry Scheme, HMRC may be about to write to you. In its latest Agent Update, published on 17 September 2026, HMRC told accountants that in October 2026 it will write to CIS registered contractors where it has identified errors in their monthly returns. A day later it published a new gov.uk page with a form for contractors who receive a letter about 2025/26.
This is not a formal investigation, and the form even lets you explain why you think your returns are right. But it is far better to find a mistake yourself than to have HMRC point it out. HMRC has named the three error areas it sees most, so you can check your own returns now, before an envelope arrives.
In a nutshell
- HMRC has announced a letter campaign. Aimed at contractors whose monthly returns show errors.
- The wrong deduction rate is the main target. Use the latest rate HMRC gave you, not an old one.
- Materials must be shown separately. Deductions usually apply to labour only.
- Figures must match your records. Check against invoices before you submit.
- No letter yet? Amend the return. Through the same route you filed it.
- Got a letter? Use the disclosure form. Even if you disagree with HMRC.
1. What HMRC has announced
There are two separate sources.
Agent Update issue 147 says HMRC will write in October 2026 to CIS registered contractors where it has identified errors in monthly returns, and lists three areas where errors usually arise. It adds that HMRC will keep checking CIS returns and may ask businesses to explain how a return was completed.
The new gov.uk page, published on 18 September, says HMRC is sending letters to contractors it believes may have applied an incorrect rate to subcontractor payments made between 6 April 2025 and 5 April 2026. The letter carries a reference starting CFSS, explains why HMRC thinks there may be an error, and tells you how to correct it.
HMRC has not said these are the same letters, but the form appeared one day after the announcement and looks like the response route for it. The gov.uk page already speaks of letters being sent, so some may already be on their way.
2. Error one: the wrong deduction rate
The rates themselves are simple: 20% for registered subcontractors, 30% for unregistered ones, and 0% for those with gross payment status. The mistake is in which one you apply. HMRC's wording is that contractors should always use the latest rate notified by HMRC, not an old rate or one used on a previous return.
In practice this goes wrong in two ways. The first is never verifying a subcontractor, or not verifying again when you should: you must verify anyone new, and anyone you have not included on a return in the current or previous two tax years. The second is missing a change. If HMRC withdraws a subcontractor's gross payment status, it writes to the contractors who have used them, and payments after the date in that notice must be made under deduction.
3. Error two: materials not recorded
CIS deductions usually apply to labour, not materials. HMRC's second error area is contractors not recording the cost of materials separately where they are included on the invoice.
It cuts both ways. Ignore materials and you deduct too much, which ties up your subcontractor's cash until it is credited against their tax. Overstate materials and you deduct too little, which becomes your problem, as section 6 explains. Only materials the subcontractor paid for directly count, you are entitled to ask for evidence, and you must keep records of materials costs for at least three years after the end of the tax year. Our earlier article on the 2026 CIS rules has a worked materials example.
4. Error three: figures that do not match
The third area is the least technical: payment, materials and deduction figures that simply do not agree with the business's own records. HMRC says these should be checked against payroll, invoice or accounting records before the return is submitted.
Typical causes are returns completed from bank payments instead of invoices, VAT left inside the figures, a subcontractor missed off in a busy month, or last month's return copied forward. A return and the payment and deduction statements you give subcontractors should tell the same story, because your subcontractors use those statements on their own tax returns.
5. No letter yet: how to correct a return
If you find a mistake and have not had a letter, gov.uk tells you to correct the return yourself.
- Returns filed through the HMRC CIS online service are amended there, using "Amend return" in the Returns menu.
- Returns filed with commercial software must be amended in that same software. HMRC's own service cannot change them.
- Some older returns may need to be corrected in writing. If the online route will not let you amend a month, the CIS helpline on 0300 200 3210 can tell you how.
If a correction changes a subcontractor's deduction, give them a corrected statement too. Correcting a mistake before HMRC raises it is generally treated more favourably than one corrected after a prompt, which is the reason to look now.
6. If a letter arrives
Do not ignore it, and do not panic. Gov.uk directs you to an online disclosure form, for which you need your business name, UTR, the letter with its CFSS reference, and details of any tax underpaid for 2025/26. The form lets you tell HMRC how much was underpaid and how you worked it out, give details of other errors, or explain why you believe your returns are correct. HMRC says you should still respond even if you disagree. It then aims to reply within 28 working days. That is HMRC's target, not your deadline, so check the letter itself for any date.
The uncomfortable rule behind all this: a contractor must pay HMRC the amount that should have been deducted, whether or not it actually was. HMRC can waive this where the contractor took reasonable care and the error was innocent, or where the subcontractor has already paid the tax on that income, but that is a request, not a right. Penalties for incorrect returns are possible where HMRC sees carelessness or intent, though HMRC has published no penalty figures for this campaign.
One safety note: HMRC says it may contact businesses by letter or email. If anything looks odd, do not use a phone number or link from the message itself: find the CIS helpline on gov.uk and check with HMRC before you pay anything.
A worked example: a contractor who missed a notice
Kowalski Build Ltd uses a subcontractor with gross payment status and pays him £2,500 a month for labour. In November 2025 HMRC withdrew the subcontractor's gross status and wrote to the company, but the notice was filed unread. The company carried on paying gross for four months.
From the date in the notice, those payments should have had 20% deducted: £500 a month, £2,000 in total. If a CFSS letter arrives, the company is asked to account for that £2,000, even though the money went to the subcontractor. If the subcontractor has declared the income and paid his own tax, the company can ask HMRC not to collect it twice. If the director finds the slip now, he can amend the four returns and deal with it on his own terms.
Things to watch out for
- Verify, and re-verify. Anyone new, and anyone not on a return in the current or last two tax years.
- Open HMRC post about subcontractors. A change of status applies from the date in the notice.
- Split labour and materials on every invoice. Ask for evidence if the materials figure looks high.
- Build the return from invoices. Not from memory or the bank statement.
- Amend in the system you filed in. Software returns cannot be changed in HMRC's service.
- A separate new penalty exists, for something else. From 6 April 2026 HMRC can charge up to 30% where a business knew or should have known a payment was connected to deliberate non-compliance, in other words fraud in the supply chain. It is not a penalty for an honest mistake on a return.
How Ollen Services Can Help
We file CIS returns for contractors every month, so we know where these errors hide. We can review your 2025/26 returns against your invoices and verification records, amend anything that is wrong before HMRC asks, and issue corrected statements to your subcontractors.
If a letter has already arrived, we can work out whether HMRC is right, complete the disclosure form as your agent, and ask for the liability to be waived where the rules allow it. We work in English and Polish.
Call us on 07513 491 259 or email hello@ollenservices.co.uk. An hour spent checking now is much cheaper than a letter later.