CIS Error Letter 2026 — Correct 2025/26 Returns

HMRC is contacting some UK construction contractors about possible incorrect CIS deduction rates applied to subcontractor payments between 6 April 2025 and 5 April 2026. If you receive one of these letters, check the letter and records carefully, then use HMRC's official CIS correction process to either disclose the underpaid amount or explain why the returns were correct.

This is a response guide for the letter-specific workflow. It is separate from the general Construction Industry Scheme guide, which explains ordinary rates, monthly returns, materials and gross-payment status. The CIS Calculator→ can help model a deduction, but it cannot decide whether the historical return or HMRC's letter is correct.

Who should use the correction process?

Use the HMRC process if you received a letter saying that the contractor may have applied an incorrect CIS rate to subcontractor payments during the 2025/26 tax year. HMRC's guidance says the process can be used by an individual, a designated member of an LLP, a trustee, a representative of an estate, a company officer or an authorised agent.

The letter is not, by itself, a final calculation of the tax due. It is a request to review and report the relevant facts. A contractor may either owe more because deductions were too low, or have evidence that the original return was correct. The response should follow the figures and period in the notice rather than assume every CIS payment in the year is affected.

What to check before responding

Build a transaction-level reconciliation for the periods identified by HMRC. Check:

Do not correct a rate simply because the net payment looks unusual. A difference can result from VAT, materials, plant hire or other permitted deduction-base items. Check the contractual chain and who paid each cost before recalculating.

If the contractor underpaid CIS deductions

If the review confirms that the wrong rate was applied and too little CIS was deducted, use the HMRC form to report the amount underpaid and explain how it was calculated. Keep the calculation with the underlying invoices, verification results, payment statements and amended internal reconciliation.

The correction process does not make the contractor's other CIS obligations disappear. Continue to keep the normal CIS records, correct any relevant accounting entries and consider whether the error affects the subcontractor statement or another tax return. Do not promise a particular penalty or repayment result without checking HMRC's response and the facts of the case.

If the contractor believes the returns were correct

If the contractor disagrees with HMRC's suggestion, the form can be used to explain why the returns were correct. Set out the affected payments, the verification result, the rate used, the calculation base and the evidence supporting each conclusion.

A short statement such as “the rate was correct” is unlikely to be enough on its own. Reconcile the figures to the monthly return and identify the exact rule or record that supports the treatment. An authorised agent should retain evidence that the contractor approved the disclosure or explanation.

What information should be ready?

HMRC says the form requires the business name, UTR, the letter including its CFSS reference and details of underpaid tax for 2025/26. Prepare the wider working papers before starting so the amount entered can be traced back to the source records.

Keep copies of:

1. the HMRC letter and any attached schedule;
2. subcontractor verification results and UTRs;
3. invoices, contracts and payment dates;
4. VAT and qualifying-material calculations;
5. CIS300 returns, payment-and-deduction statements and payment confirmations;
6. the calculation submitted to HMRC; and
7. any later HMRC correspondence or payment instruction.

HMRC says it aims to contact the person submitting the form within 28 working days. That is an administrative aim, not a guarantee that the matter will be resolved within that period or that no further information will be requested.

What if no letter was received?

If no letter was received, do not use the letter-specific form merely because a CIS return may contain an error. HMRC directs contractors to use the CIS online service to change or correct a return. Follow the normal correction route, preserve the evidence and check whether later monthly returns or statements need adjustment.

Recalculate the deduction in the right order

The rate should be the last part of the calculation, not the first. Start with the subcontractor's gross invoice and identify the payment date. Remove only the items permitted in the CIS deduction calculation and supported by the records: VAT, qualifying materials paid for directly by the subcontractor, plant hire, fuel other than travelling fuel, and consumable stores. Then apply the rate HMRC returned when the subcontractor was verified. A contractor who applies 20% to the wrong deduction base can still underpay even if the verification rate itself was correct.

For example, if an invoice is £10,000 including £2,000 VAT and £3,000 of materials that the subcontractor bought directly and can evidence, the provisional CIS base is £5,000. A 20% rate would produce a £1,000 deduction and a £4,000 net payment before any other permitted item. This is only an illustration: the invoice, evidence, VAT status, payment date and verification result control the real calculation. Do not copy the example into the HMRC form without rebuilding the affected transactions.

Keep separate schedules for payments treated as 20%, 30% and gross. If the subcontractor's status changed, identify the date and the verification result for each payment rather than applying one rate to the whole year. If a subcontractor was not verified, or the contractor cannot prove the verification response, escalate the issue before deciding that HMRC's letter is wrong.

Common reasons the letter figures may differ

The HMRC estimate and the contractor's ledger may use different definitions of gross payment or different periods. Check whether the letter identifies payment dates or return months, whether a credit note was issued later, whether a payment was split across invoices and whether materials were entered as a deduction without direct-payment evidence. A bookkeeping system may also post VAT or plant hire to a separate account while the CIS return requires the amount to be considered in the payment calculation.

Reconcile three totals independently: the amount paid to the subcontractor, the CIS deduction shown on the payment-and-deduction statement, and the CIS amount reported for the tax month. Then reconcile those totals to the bank and nominal ledger. The exercise should identify each affected payment and explain any difference, not merely produce one rounded annual number.

If the error affects several subcontractors, retain a row-level schedule and a summary by tax month. Include the original rate, corrected rate, original base, corrected base, original deduction, corrected deduction and difference. This gives HMRC a traceable disclosure and helps the contractor correct management accounts without changing unrelated transactions.

What the letter form does and does not settle

Submitting the form is a disclosure and explanation process. HMRC says it will review the information and decide whether the contractor needs to pay; the form is not a self-certified final assessment. A contractor should still disclose an underpayment even when the final amount may be reviewed, and should not treat the form as permission to delay ordinary CIS compliance.

The form also does not automatically decide penalties, interest, subcontractor repayment, Corporation Tax or the subcontractor's own Self Assessment position. Ask HMRC or a qualified adviser how the correction affects those separate matters. Do not tell a subcontractor that an amended contractor return automatically changes their tax bill or guarantees a repayment. Keep the contractor's disclosure, payment evidence and any communication with the subcontractor in separate folders.

Writing an evidence-led explanation

Use a short structure that a reviewer can follow:

1. identify the CFSS reference, business and affected months;
2. state whether the contractor accepts an underpayment or disputes HMRC's finding;
3. describe the verification result and rate for each affected group;
4. explain the deduction base, including VAT and supported materials;
5. show the original and corrected totals and the resulting difference; and
6. list the records available if HMRC asks for them.

Avoid speculative explanations such as “the software must have changed” unless the contractor can show the software setting, date and affected transactions. If the evidence is incomplete, say what is missing and use a provisional calculation only where HMRC's form and an adviser support that approach. Accuracy and traceability are more useful than a long narrative that does not identify the payments.

Frequently Asked Questions

For the ordinary 2026/27 rates, monthly deadlines and gross-payment rules, read the Construction Industry Scheme guide. Keep the correction calculation separate from the subcontractor's eventual Self Assessment or Corporation Tax liability.

Official sources

• HMRC: Report CIS contractor monthly return errors after receiving a letter
• HMRC: What is the Construction Industry Scheme
• HMRC: File CIS monthly returns
• HMRC: Make deductions and pay subcontractors