Apart from the fact that you're paying tax on money you haven't been given yet, there are a few pitfalls and dangers lurking in the CIS system. For one thing, since you're paying tax from the very first penny you earn, there's a chance you might not be getting the full benefit of your tax-free Personal Allowance. That's one of the reasons why it's so important to get your Self Assessment tax returns right. There's a section in there to list all the CIS deductions you've had taken from your pay.
Beyond that, there's obviously the very big danger of failing to get registered for CIS on time – or at all. That can easily see you losing 30% of your pay instead of the normal 20%. It's an easier mistake to make than you'd think, too. A lot of people get into trouble each year because they don't properly understand their employment status, and there's some seriously bad advice floating around out there. You might also be getting bad information from somewhere on how much to claim when you sort out your CIS tax return, which can lead to major hassle from HMRC when they catch up to you - which they eventually will.
If you're on both sides of the fence as a contractor and subcontractor, working with CIS can be a strain on your cash flow. As we mentioned before, you'll be losing 20% of your pay – which is cash you probably need to pay your own subbies. Planning is the key here.
Finally, you've got to watch out for the double taxation trap. If you don't send in your Self Assessment tax return on time, you can end up getting an estimated tax bill from HMRC. With CIS muddying the waters, it's not hard to find yourself getting a bill from HMRC when you've already paid your deductions. It's not usually too difficult to set things straight by getting the taxman the information he needs, but it's definitely a nasty situation to be in while it lasts.