Construction Industry Scheme (CIS) Case Studies
What does getting CIS right actually save? The five real cases below cover gross payment status under the 2026 rules, materials deductions, recovering CIS suffered, deemed contractor registration and landlord contributions to tenant fit outs. Between them they protected hundreds of thousands of pounds of our clients’ cash.
CIS work rewards advisers who know how HMRC approaches the scheme. Our team includes ex-HMRC experience, and it shows in how these cases were run.
How we helped a subcontractor keep gross payment status after an HMRC supply chain enquiry
The issue. A £12m turnover groundworks contractor was told by HMRC that one of its labour suppliers had been part of a fraudulent chain. Under rules that took effect on 6 April 2026, HMRC can cancel gross payment status immediately where a business knew or should have known it was involved, charge the lost tax even though the invoices were paid in full, and impose a penalty of up to 30% on the business, all or part of which it can then transfer personally to the directors. Reapplication is now barred for five years rather than one.
What we did. Losing gross payment status would have meant a 20% CIS deduction on every payment received, across every contract, for a business with thin working capital and framework agreements that require it. HMRC’s letter arrived within weeks of the new rules taking effect and we were instructed the same month. Because a cancellation decision carries a right to a statutory review with its own short timetable, the priority was evidence rather than argument. We built the due diligence file: verification records, supplier onboarding checks, insurance and accreditation evidence, site records showing the labour was genuinely supplied, and the bank trail. We then presented it to HMRC as a defence to the “should have known” test and dealt directly with the officer.
The outcome. Gross payment status was retained through the review process, no personal penalties have been raised against the directors, and the client now runs a documented supplier due diligence process on every new engagement.
Note. The wider position on the tax said to have been lost in the chain remains open at the time of writing, which is normal at this stage of an enquiry of this kind.
What counts as materials under CIS, and the £31,000 it was worth
The issue. A Tameside civil engineering contractor was deducting CIS at 20% on the gross value of its subcontractor invoices. Its subcontractors were unhappy, one had walked off site over cash flow, and the contractor’s own accountant had told it that deducting on the gross figure was the safe option. Over a year the over deduction ran to around £31,000 of working capital taken out of the supply chain unnecessarily.
What we did. CIS is deducted from the payment less the direct cost of materials borne by that subcontractor, so getting it wrong in either direction is a problem. Deduct too little and the contractor is liable. Deduct too much and you starve your own supply chain. We rebuilt the process. Since 6 April 2021 only materials whose direct cost the subcontractor itself has borne reduce the payment, so materials bought further up or further down the chain, or supplied free by the contractor, do not count. Beyond that, materials, consumable stores, fuel other than fuel for travelling, plant hired in from a third party and the cost of prefabrication all reduce the payment subject to deduction. Plant the subcontractor owns does not attract a notional hire charge, although the fuel and consumables still count. Plant hired with an operator is itself a construction operation. Materials the subcontractor was reimbursed for are not deductible at all. We then set a simple evidence standard, copy supplier invoices rather than a percentage estimate, and briefed the subcontractors on it.
The outcome. Deductions fell to the correct figure, the supply chain kept £31,000 a year of cash it should always have had, and the contractor holds a file that stands up if HMRC reviews it.
How we recovered £84,000 of CIS deductions for a limited company subcontractor
The issue. A limited company subcontractor had suffered £84,000 of CIS deductions over two years and had never recovered a penny of it. Nobody had submitted an employer payment summary claiming the deductions, several contractors had never issued payment and deduction statements, and HMRC had already refused one request for duplicates.
What we did. A limited company subcontractor recovers CIS through the payroll, not the tax return. The deductions suffered go on a monthly employer payment summary, HMRC offsets them against PAYE and National Insurance, and any excess is carried forward within the tax year and repaid after the year end. Two things make this go wrong. HMRC has been able to amend or remove a set off claim since April 2021 where the evidence does not support it, and it can then bar the company from making any further claim for the rest of that tax year. Separately, since December 2022 HMRC deals with only one request per customer for copy statements, which this client had already used. We went back to each contractor directly for statements, reconciled every deduction to the bank, filed the corrected returns and submitted the repayment claim with the full evidence pack.
The outcome. £84,000 recovered, the PAYE account brought into order, and a monthly process put in place so the deductions are now claimed as they arise rather than years later.
The care home group that did not know it had to register for CIS
The issue. A care home operator ran a £4.2m refurbishment and extension programme across its sites. It is not a construction business and had never registered for CIS. It paid its trades gross. HMRC opened a review and proposed assessments of £310,000 for deductions that should have been made, plus penalties.
What we did. Any business, in any sector, becomes a deemed contractor once construction spend passes £3m in a rolling twelve month period. It is a continuous test, not a year end one. There is a separate exemption from operating deductions on property used for the purposes of your own business, but that spend still counts towards the £3m threshold, and that is the part almost everyone has backwards. The exemption also fails for property held for sale, held to let, or held as an investment. Once we had established the group was a deemed contractor we applied for directions on the basis that the subcontractors had accounted for the tax on the payments they received, brought the registration up to date, and showed that most of the spend was on property in the group’s own occupation and so carried no deduction obligation going forward.
The outcome. The proposed assessments were reduced to £18,000, the penalties were cancelled, and the group now monitors its rolling construction spend monthly.
Landlord’s £450,000 fit-out contribution taken outside CIS
The issue. A landlord agreed to contribute £450,000 towards an incoming tenant’s fit-out. Its advisers treated the payment as being within CIS and were preparing to apply deductions of up to £90,000, holding back cash from a tenant that needed it to start work. The deal was at risk.
What we did. Since 6 April 2024 there has been a specific exclusion for landlord contributions to tenant works, but it only holds if all five conditions are met, and the works have to be intended primarily for the benefit and use of the tenant. Part of this contribution covered replacement windows and a fire safety installation, which are core building works the landlord benefits from. The exclusion is tested against the payment, and where a single payment covers works that are not primarily for the tenant’s benefit there is no published basis for apportioning it, so the safe assumption was that the whole £450,000 was at risk. We had the contribution restructured into two separately documented payments, one for the tenant specific fit-out inside the demise and one for the landlord’s own works, contracted directly by the landlord. We also put the evidence requirements in place, including copy invoices and warranties from the tenant’s contractor.
The outcome. The fit-out contribution of £372,000 fell outside CIS and was paid in full. Only the landlord’s own works stayed within the scheme. The tenant received up to £74,400 more cash on day one and the lease completed on time.
Could we do the same for you?
Every case above started the same way: a business owner asking us to look again at something another adviser had treated as settled. Merit is dual qualified. We are Chartered Accountants and Chartered Tax Advisers, our founder worked inside HMRC, and our partners have built businesses of their own. In most cases the tax we save exceeds the fee we charge.
Related services: Construction Industry Scheme services · VAT returns · HMRC tax investigations.