What is a CIS investigation?

A CIS investigation is one of the most intrusive and technical enquiries HM Revenue & Customs (HMRC) can open into a business operating under the Construction Industry Scheme (CIS).

It can affect contractors, subcontractors, directors, and even connected businesses.

Yet for all its seriousness, many construction firms only discover the finer points of CIS compliance after HMRC has launched an investigation.

As someone who deals with tax disputes day in, day out, I can say confidently that CIS investigations are rarely random.

They are usually triggered because something has caught HMRC’s attention, whether it is a pattern in your returns, a mismatch in records, or concerns about employment status.

When HMRC decides to look into your CIS position, their spotlight can be uncompromising.

Below is a deep dive into what a CIS investigation involves, how it unfolds, why HMRC is so focused on this area, and what contractors and subcontractors can do to protect themselves.

Understanding the Construction Industry Scheme

Before exploring the mechanics of a CIS investigation, it helps to revisit the fundamentals of CIS.

The Construction Industry Scheme regulates how payments from contractors to subcontractors are handled for Income Tax and National Insurance. Under the scheme:

• Contractors must register and take deductions from subcontractor payments
• Subcontractors receive payments with deductions at twenty per cent or thirty per cent unless they hold gross payment status
• Monthly returns must be submitted to HMRC
• Employment status must be considered carefully
• Records of payments, contracts, and verification checks must be maintained

Given the number of moving parts, it is no surprise that HMRC regards CIS as a high-risk area for errors.

What triggers a CIS investigation?

In my experience, HMRC does not typically launch a CIS investigation without reason. Triggers can include:

• Patterns in monthly CIS returns – If your returns show inconsistent deductions, frequent nil returns, or sudden changes in subcontractor numbers, HMRC may take a closer look.
• Mismatches in payroll, CIS, and VAT – HMRC’s systems cross-reference everything. If your declared turnover does not line up with your CIS payments or VAT figures, it creates a red flag.
• Concerns about employment status – One of HMRC’s biggest focuses is whether subcontractors should be classed as employees for PAYE instead. If HMRC suspects disguised employment, expect questions.
• Failures around verification – If you skip or incorrectly perform subcontractor verification checks, HMRC will want to know why.
• Late payments or persistent compliance issues – Repeated late filing or late payment signals weak controls and attracts scrutiny.
• Industry intelligence – HMRC receives information from many sources, including other contractors, insolvency practitioners, and even anonymous reports.

Whatever the trigger, once HMRC opens a CIS investigation, the burden is on you as the taxpayer to justify your position and demonstrate compliance.

What HMRC looks for during a CIS investigation

A CIS investigation is not simply a review of a few monthly returns. HMRC will take a wide view, often covering several years. They focus on:

• Correctness of deductions – Were the right rates applied? Were subcontractors verified? Are the figures consistent with accounting records?
• Employment status – Perhaps the biggest area of dispute. HMRC examines whether subcontractors are genuinely self-employed or whether they should be within PAYE. This includes reviewing:
  • Contracts
  • Working practices
  • Supervision, direction and control
  • Provision of equipment
  • Financial risk

In construction, working practices often do not match what is written on paper, which HMRC is quick to exploit.

• Eligibility for gross payment status – If you have gross payment status, HMRC will assess whether you have met the compliance conditions. Any slip may lead to suspension or withdrawal.
• Record keeping – HMRC expects meticulous records. Missing contracts, incomplete invoices, and inconsistent payment records can all lead to adjustments or penalties.
• Treatment of materials – This is a surprisingly contentious area. HMRC will test whether deductions for materials are reasonable or whether labour has been disguised as materials to reduce the CIS deduction. This is typically where disputes get technical. Firms believe they have acted correctly, but HMRC often disagrees, especially if they believe subcontractors have inflated materials costs.

The investigation process step by step

Although every CIS investigation is different, most follow a similar pattern.

Firstly, you will receive an opening letter notifying you that they are checking your Construction Industry Scheme compliance. This usually includes requests for records, contracts, and evidence.

Next, HMRC will seek to gather information and may ask for:

• Payment records
• Subcontractor lists
• Verification evidence
• Contracts and job sheets
• Bank statements
• Accounting records
• Employment contracts for PAYE staff

If the enquiry involves employment status, expect extensive questioning.

Thirdly, comes the interview stage where HMRC often requests an interview with the contractor.

From experience, this is where businesses can accidentally weaken their position by assuming HMRC is there for a friendly chat. They are not. They are building a case.

Once HMRC has the data, they analyse it, sometimes for months and they’ll often raise concerns about:

• Incorrect deductions
• Missing verification
• Failure to assess employment status
• Over-claimed materials
• Gaps in record keeping
• Non-compliance affecting gross payment status

Then, HMRC issues assessments for under-deducted CIS, potential PAYE liabilities, penalties, and interest.

In serious cases, they may also begin a broader tax investigation.

The consequences of a CIS investigation

The consequences of a CIS investigation can be significant:

• If HMRC believes insufficient deductions were made, they can assess you for the shortfall.
• If subcontractors are reclassified as employees, the contractor may be liable for PAYE, employer NICs and penalties.
• This is one of the most damaging outcomes. Losing gross payment status can disrupt cashflow and subcontractor relationships.
• Penalties can apply for failure to take reasonable care or for deliberate errors.

A CIS investigation often uncovers issues elsewhere, leading to further enquiries into VAT, Corporation Tax or PAYE.

Should you handle a CIS investigation yourself?

Most businesses should not attempt to deal with a CIS investigation alone.

HMRC investigations are technical, time-consuming, and adversarial. We regularly see businesses unintentionally harm their position by:

• volunteering unnecessary information
• answering questions without understanding their implications
• misunderstanding the law
• failing to present evidence properly
• agreeing with HMRC before seeking advice

A tax disputes specialist can protect you from avoidable errors, handle communication with HMRC, and ensure that your legal position is put forward clearly and robustly.

You cannot always prevent HMRC opening an enquiry, but you can reduce the risk:

• Keep detailed records
• Verify subcontractors properly
• Review employment status regularly
• Avoid inflated materials claims
• Keep your returns up to date
• Seek advice before changing payment structure or subcontractor arrangements
• Conduct internal CIS compliance reviews

A proactive approach often prevents problems becoming liabilities.

Final thoughts

A CIS investigation is one of the more complex and disruptive enquiries HMRC can launch.

It requires technical understanding, strong evidence, and careful handling and with the construction sector under heightened scrutiny, contractors and subcontractors need to ensure that their CIS processes are watertight.

Handled correctly, a CIS investigation does not need to be disastrous but when handled poorly, it can escalate into years of assessments, penalties and cashflow issues.

The difference often lies in understanding the rules, keeping detailed records and getting expert representation as early as possible.

If you would like help preparing for an investigation or need support with an enquiry already underway, please speak to the inTAX team.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients