Small construction firms receiving an HMRC letter about subcontractor deductions now have a specific route for responding. Guidance published on 18 September explains how contractors should report possible Construction Industry Scheme (CIS) errors for the 2025/26 tax year, including how to challenge HMRC’s findings when their records support the original returns.
The first check is whether your business has actually received the letter. This response form is intended for those contacted by HMRC; contractors finding an unrelated mistake should use the normal CIS online service.
What the new guidance covers
According to HMRC’s new letter-response guidance, the letters concern potentially incorrect deduction rates on subcontractor payments made between 6 April 2025 and 5 April 2026. They explain the suspected problem and how to correct it.
The form lets recipients report an underpayment and their calculation, identify other correctable errors, or explain why they believe their returns are right. HMRC will review the information before deciding whether payment is needed. It aims to contact respondents within 28 working days, rather than promising a completed resolution within that period.
Have the business name, Unique Taxpayer Reference, letter and its reference beginning CFSS ready, alongside details of any underpaid tax. An accountant or other agent responding for the business must have the appropriate authority.
Build a clear record before replying
A useful starting point is to gather the affected monthly returns, subcontractor invoices, payment records and verification results into one working file. Give the review to someone who can follow a payment from the invoice through to the deduction and the return. In a small firm, that may mean the owner and bookkeeper working together.
For each questioned payment, note the date, the subcontractor, the rate used and the evidence behind it. Keep the original figures alongside any proposed correction so that the explanation is easy to check. If your records disagree with HMRC’s information, set out the difference clearly rather than changing figures simply to match the letter.
These are practical preparation steps, not extra requirements imposed by the new guidance. If the calculation or treatment is uncertain, ask your accountant or tax adviser to review it before submitting a response. Keep a copy of what you send and any acknowledgement.
Check the deduction process as well as the paperwork
HMRC’s subcontractor verification guidance says contractors must verify a new subcontractor before payment. Verification tells the contractor which deduction rate to use, or whether payment can be made without deductions. A previous subcontractor must also be verified if they have not appeared on a CIS return in the current or previous two tax years.
The published CIS deduction guidance lists rates of 20% for registered subcontractors, 30% for unregistered subcontractors and 0% for those with gross payment status. Use HMRC’s verification result rather than assuming that every supplier should have the same rate.
Also check the amount to which the rate was applied. HMRC’s guidance explains the treatment of VAT, qualifying materials and other specified costs. A rate check alone will not resolve a calculation made on the wrong basis.
Keep current returns on track
Allocate time for the historical review without letting current filing slip. BritishSME’s earlier article on CIS nil returns and quiet months covers a separate part of the monthly routine. The new letter-response process concerns earlier deductions, so keep the two jobs clearly assigned.
If you have not received a letter but discover a mistake, HMRC directs you to its CIS online service to make corrections. Its general enquiries page provides official contact details if you need help. For letter recipients, follow the instructions in your own correspondence and get advice promptly where the position is unclear.
