CIS & VAT Pitfalls That Could Be Costing You

You’re filing your returns on time - but still paying too much, or too early.

And the worst part? You might not even realise it’s happening.

Construction tax rules are a trap for the unprepared.

You don’t have to break any laws to end up losing money. You just have to do things “the usual way” and you’re giving HMRC more than you should, or sooner than you need to.

The three biggest mistakes I see  every single month are simple ones. But they cost serious cash:

1. Incorrect CIS deductions - both over and under

Here’s what I see too often:

A subcontractor hands in their invoice, and the business owner either:

• Deducts 30% “just to be safe”
• Or applies 0% to keep the subbie happy, especially if they’re grumbling about deductions

Both are risky. Here’s why:

• Over-deducting (e.g. taking 30% when the subbie should be on 20%) ties up their cash unnecessarily. It damages relationships, creates admin headaches, and slows down reconciliation.
• Under-deducting (e.g. applying 0% or 20% without verification) opens you up to HMRC penalties. If they audit and find you didn’t verify properly or applied the incorrect rate, you’re liable for the shortfall - not the subbie.

And yes, subcontractors will push back. No one wants to lose 20–30% of their invoice.

But this isn’t a choice, it’s HMRC’s rules. You’re the one on the hook if it goes wrong.

Get every subcontractor verified before you pay them.

It takes minutes in your accounting software or through HMRC - and it protects both sides.‍

2. Late recovery of input VAT

If you’re buying materials, tools, vans, or paying suppliers, you’re likely owed VAT back.

But if you’re not reclaiming that VAT as quickly as possible, either because returns are done quarterly instead of monthly, or your bookkeeping is behind, you’re sitting on cash that should be back in your account.

Example: You spend £30,000 on a major project in January, and your VAT return doesn’t go in until April. That’s £6,000 in VAT you could have reclaimed months earlier.

For growing businesses, that kind of lag can be the difference between making payroll comfortably or stressing over the bank balance every Friday.

3. Incorrect use of DRC (Domestic Reverse Charge)

The Domestic Reverse Charge for VAT is one of the most misunderstood tax rules in the trade.

It applies to certain construction services where you don’t charge VAT on your invoice - the customer accounts for it instead.

If you get it wrong:

• You might overcharge clients VAT they shouldn’t be paying
• Or undercharge, and absorb VAT you’re still liable for
• Or lose credibility when HMRC flags inconsistencies

The rules depend on whether you’re working for an end user, another contractor, or on a mixed-scope job.

Most construction and trades businesses and even some bookkeepers get it wrong and HMRC doesn’t care whether it was an honest mistake.

Actionable Tip:

Here’s a practical checklist you can walk through this week:

1. Subcontractor Verification

• Double-check that every subbie on your books is verified with HMRC.
  
• Log their status: 0%, 20%, or 30%. Set this in your payroll or accounting software so it sticks.

2. VAT Treatment Per Job

• Look at a mix of your recent invoices: are you using standard VAT, zero-rated, or reverse charge correctly?
• For jobs under CIS or between contractors, confirm whether DRC applies.
• Make it part of your quoting or job setup process - not something you scramble to fix after invoicing.

3. Input VAT Recovery

• How quickly are you submitting VAT returns? Monthly is more admin, but often worth it for quicker reclaim.
• Are you capturing all receipts and invoices promptly?
• Get someone to reconcile them weekly. Don’t leave it all to quarter-end panic.

Try This:

Review your last 3 CIS and VAT returns.

Ask yourself:

• Do you understand what’s been deducted and why?
• Are there any late claims, missed invoices, or VAT that looks off?
• Is anything hard to follow - or do you rely entirely on your bookkeeper’s word?

If you can’t answer confidently, that’s not peace of mind - it’s a warning sign.

This stuff doesn’t need to be complicated. But it does need to be checked.

Because these are the kinds of little errors that could be costing you thousands a year.