If you can't pay CIS deductions you've withheld from subcontractors, HMRC treats the debt differently from ordinary corporation tax arrears because the money was never really the company's to spend. Under the Construction Industry Scheme (CIS), a contractor deducts tax at source from subcontractor payments and holds it for HMRC. When that money has been spent on wages, materials or other costs instead of being paid over, HMRC sees it as a specific and pressing form of tax arrears.
This article explains how CIS deductions work, what penalties apply, whether directors face personal liability, and what realistic options exist for a construction company that cannot pay what it owes.
How CIS deductions work and why HMRC treats them as money it is owed
Under the Construction Industry Scheme, a contractor pays registered subcontractors net of a deduction — usually 20% for verified subcontractors or 30% if unverified. That deducted amount is not the contractor's revenue. It belongs to HMRC and should be paid over monthly, alongside a return showing who was paid and how much was deducted.
In cash-flow terms, this creates a trap familiar to many contractors. The gross payment lands in the company bank account, but a slice of it is already earmarked for HMRC. If that slice gets absorbed into general trading costs — wages, materials, plant hire — the company can end up owing HMRC money it no longer holds.
HMRC's view is straightforward: CIS deductions are money held on trust for the Exchequer, similar in principle to PAYE deductions from employees. Falling behind is treated as more serious than simply being late paying a tax the company itself owed outright, such as corporation tax.
The monthly return and payment deadlines you have missed
CIS runs on a strict monthly cycle. The return covering deductions made in a tax month (6th to 5th) must reach HMRC by the 19th of the following month. Payment of the deductions is due by the 22nd if paid electronically, or the 19th by cheque.
Missing either deadline once is common and rarely catastrophic on its own. The problem builds when returns and payments are missed repeatedly, because HMRC's systems flag a pattern quickly, and penalties accrue on a monthly, compounding basis rather than as a single one-off charge.
Common warning signs include:
- Several months of CIS returns filed late or not at all
- Payment reminders or telephone contact from HMRC's debt management team
- Deductions genuinely made from subcontractors but not passed on
- Growing arrears alongside separate PAYE or VAT debts
CIS late filing and late payment penalties
CIS penalties are charged separately from PAYE and VAT penalties, and they escalate quickly for repeated lateness. For a late monthly return, HMRC typically applies:
- £100 if the return is one day late
- A further £200 if it is still outstanding after two months
- The greater of £300 or 5% of deductions shown on the return if it is six months late
- A further, equally severe charge if it reaches twelve months late
Late payment interest also runs on the unpaid deductions from the due date until they are cleared. Full detail on how these charges are calculated is set out in HMRC's guidance on penalties for late CIS monthly returns. Where a pattern of persistent late filing or non-payment is found, HMRC can also apply higher penalties for prolonged failure, and may open a wider compliance review of the contractor's CIS records.
Is unpaid CIS treated like PAYE for personal liability?
Directors often ask whether unpaid CIS deductions can become a personal debt in the way that unpaid PAYE sometimes can. In normal circumstances, CIS and PAYE arrears are company debts, not personal ones — the company, not the director, owes HMRC.
That said, personal exposure can arise in specific circumstances:
- Personal liability notices — HMRC can, in some cases involving deliberate default or fraud, seek to make an officer of the company personally liable for unpaid deductions.
- Wrongful or fraudulent trading — if a company continues trading while insolvent and deductions are knowingly withheld or misused, a liquidator can later pursue directors personally under the Insolvency Act 1986.
- Director's loan accounts — if money that should have gone to HMRC was instead drawn out as director's loans, that overdrawn balance becomes a separate personal liability.
These are not routine outcomes for a contractor who has simply fallen behind through cash-flow pressure. They tend to arise where there is evidence of deliberate non-payment or continued trading with no realistic prospect of recovery, which is why getting early, regulated advice matters if arrears are building.
How CIS arrears fit into a Time to Pay arrangement
HMRC can agree a Time to Pay arrangement covering CIS arrears, often alongside other tax debts such as PAYE, VAT or corporation tax. This allows the company to repay what it owes in instalments rather than facing immediate enforcement action.
HMRC typically expects:
- Up-to-date CIS returns, even if the deductions shown have not yet been paid
- A realistic, affordable monthly instalment based on actual cash flow
- Continued compliance with new CIS obligations going forward — arrears cannot be an excuse to fall further behind
- Some evidence the company can trade its way through the arrangement
Where CIS debt sits alongside PAYE and VAT arrears, HMRC will usually want a single arrangement covering everything, rather than separate deals for each tax. If the numbers do not add up — if the company cannot realistically clear the arrears even with time — HMRC is unlikely to agree, and other options need considering.
Losing gross payment status and its knock-on effect
Contractors with gross payment status receive full payment from other contractors without deduction, which is often essential to cash flow. Persistent CIS arrears or repeated late payment is one of the main triggers for HMRC to review and withdraw that status.
Losing gross payment status has a direct, practical impact:
- Future payments received from other contractors are made net of deduction, tightening cash flow further
- Reapplying for gross status usually requires a clean compliance record for a set period
- Clients and main contractors may query the change, affecting commercial relationships
This creates a difficult cycle: arrears cause the loss of gross status, which then reduces incoming cash flow, which makes clearing the arrears even harder. Recognising this risk early is one reason to address CIS debt before it compounds.
What happens if you can't pay CIS deductions and the company can't recover
Sometimes cash flow has deteriorated too far for repayment, even with a Time to Pay arrangement, to be realistic. At that point the director's focus shifts from managing the debt to understanding the company's formal options.
These generally include:
- Company Voluntary Arrangement (CVA) — a formal agreement with creditors, including HMRC, to repay a proportion of debts over time while continuing to trade.
- Administration — a process aimed at rescuing the company, or achieving a better outcome for creditors than immediate closure, under the supervision of an insolvency practitioner.
- Creditors' Voluntary Liquidation (CVL) — an orderly, director-led closure where a licensed insolvency practitioner winds up the company and deals with creditors, including HMRC.
- Compulsory liquidation — if HMRC issues a winding-up petition and it is not resolved, the court can order the company into liquidation, with the petition also advertised in The Gazette.
If HMRC's arrears, including CIS debt, are affecting the wider business, it's worth reading about the general position when a company owes HMRC and can't pay, which sets out how these options compare across different types of tax debt. A regulated insolvency practitioner can assess which route fits the company's specific circumstances.
Frequently asked questions
Can I be personally liable if I can't pay CIS deductions?
Usually not, as CIS arrears are a company debt. Personal liability can arise in cases involving deliberate non-payment, fraud, or wrongful trading, or where money was drawn out as director's loans instead of paid to HMRC.
What happens if I file CIS returns late but haven't paid yet?
Filing on time, even if payment follows separately, avoids the late filing penalties that escalate the longer a return is outstanding. Filing accurately also keeps the door open for a Time to Pay arrangement on the unpaid deductions.
Will HMRC accept a Time to Pay arrangement for CIS arrears?
HMRC can agree instalment arrangements for CIS debt, usually alongside any other tax owed, provided the company can show a realistic repayment plan and stays compliant with new obligations going forward.
How quickly can I lose gross payment status over unpaid CIS?
There's no fixed number of missed payments, but persistent late filing or non-payment is a common trigger for HMRC's compliance test, and status can be withdrawn following a review.
What if the company simply cannot pay its CIS arrears at all?
Where repayment isn't realistic, formal options such as a CVA, administration or liquidation may need considering, ideally with input from a licensed insolvency practitioner before HMRC takes enforcement action.
This article is general information, not legal, financial or insolvency advice, and does not cover every circumstance. Directors should speak to a regulated specialist about their company's own position.
If you'd like to talk it through, Harbourfirst can introduce you to a regulated insolvency specialist — start an enquiry.