Verify subcontractors with HMRC under CIS

As a contractor registered for the Construction Industry Scheme (CIS), you must verify every subcontractor with HMRC before making your first payment to them. Verification tells you what rate of CIS deduction to apply - or whether to pay them in full without deductions.

Failing to verify subcontractors is a compliance failure that can result in penalties, incorrect deductions, and problems with your monthly CIS returns.

When you must verify

You must verify a subcontractor:

• before your first payment to them
• again if the subcontractor has not been included on one of your CIS returns in the current or previous 2 tax years

You can only verify once you have a contract with the subcontractor or have formally accepted their tender. Verify shortly before you make the first payment. The verification remains valid as long as you continue to include the subcontractor on your CIS returns.

How to verify subcontractors

You need your own Unique Taxpayer Reference (UTR), your HMRC accounts office reference and your employer reference. The details you need from the subcontractor depend on how their business is set up:

• For a sole trader, you need their name, UTR and National Insurance number. You cannot verify with a temporary number, which starts with ‘TN’ or 2 digits.
• For a partnership, you need the partnership's trading name and UTR, and the nominated partner's name with their UTR or National Insurance number (or, if the partner is a company, its UTR or company registration number)
• For a limited company, you need the company name, company UTR and company registration number

The details must exactly match those the subcontractor used to register with HMRC. Even a small difference, such as ‘Ltd’ instead of ‘Limited’, can stop the match, so ask for the details in writing.

If a subcontractor cannot provide their UTR, they cannot be verified and you must deduct at the higher 30% unmatched rate.

HMRC's free CIS online service handles up to 50 subcontractors. To verify more than 50, use commercial CIS software.

Understanding the 3 payment statuses

When you verify a subcontractor, HMRC will tell you one of three payment statuses. Each status determines how much you deduct from their payments:

Gross payment status (0% deduction)

Some subcontractors receive payments without deductions because they have gross payment status. HMRC grants this to subcontractors who pass three strict tests:

• The business test: they carry out construction work (or supply labour for it) in the UK and run the business through a bank account
• The turnover test: net construction turnover (ignoring VAT and materials) in the last 12 months of at least £30,000 for a sole trader; £30,000 per partner or £100,000 for the whole partnership; £30,000 per director or £100,000 for the whole company (companies controlled by 5 or fewer persons need £30,000 per controlling person)
• The compliance test: all tax returns filed on time, no tax debts, no serious compliance failures

If a subcontractor tells you they have gross payment status, you must still verify them with HMRC. Do not rely on their word alone - HMRC's verification will confirm whether they genuinely have this status.

Net payment status (20% deduction)

Most registered subcontractors are on net payment status. You deduct 20% from the labour element of their invoice and pay this to HMRC as an advance against their tax bill.

The deduction applies only to labour costs, not materials. If an invoice includes both, you must identify the labour portion and deduct 20% from that amount only.

Unmatched status (30% deduction)

A subcontractor is unmatched if HMRC cannot find them in their records. This happens when:

• They are not registered for CIS
• The details you provided do not match HMRC's records (wrong UTR, name mismatch)
• They have recently changed their business structure

If a subcontractor is unmatched, you must deduct 30% from their labour costs. Encourage them to register for CIS or check their details with HMRC to reduce the deduction rate to 20%.

Verification reference numbers

When you verify a subcontractor, HMRC gives you a verification reference number. This is your proof that you verified them correctly.

You must record this number and keep it with your CIS records. If HMRC queries your deductions, the verification reference proves you followed the correct process.

If you cannot produce a verification reference, HMRC may treat your deductions as incorrect, even if you applied the right rate. Always keep these references safe.

Record-keeping requirements

You must keep CIS verification records for at least 3 years after the end of the tax year they relate to. HMRC can inspect these records at any time.

Your records must include:

• the subcontractor's name, UTR, National Insurance number or company registration number
• the date you verified them with HMRC
• the verification reference number HMRC gave you
• their payment status (gross, net or unmatched) at the time of verification
• payment records showing the gross amount, materials, labour, CIS deduction and net payment
• copies of deduction statements given to subcontractors

Keep these records organised and accessible. Digital records are acceptable as long as you can produce them on request.

Penalties for not verifying

Failing to verify subcontractors has serious consequences:

If you discover you have not verified a subcontractor, verify them immediately before your next payment. For past payments made without verification, you should review whether the correct deduction rate was applied and consider whether to make a voluntary disclosure to HMRC.

Common verification problems and solutions

Subcontractor comes back as "unmatched"

First, check you entered their details correctly - a single digit wrong in the UTR will cause a mismatch. If details are correct, ask the subcontractor to:

• Check their UTR on correspondence from HMRC
• Register for CIS if they have not already done so
• Contact HMRC if their business structure has recently changed

Until they are matched, you must deduct at 30%.

Subcontractor disputes the deduction rate

If a subcontractor believes they should have a different status (for example, they claim gross payment status but your verification shows net), provide them with evidence of your verification. They should contact HMRC directly to resolve the discrepancy - this is not your responsibility to fix.

Previous contractor's verification

You cannot rely on verification carried out by another contractor. Each contractor must verify subcontractors for themselves. If you take over a project with existing subcontractors, you must verify each one before you make payments to them.