A subcontractor owed a refund after CIS was deducted at source

Would you rather someone else handled this? Our CIS tax refund service means we check your deductions and claim back what HMRC owes you.

This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.

The scenario

A self employed groundworker works through several contractors across the year. Each one deducts 20% from his labour under the Construction Industry Scheme before paying him. Say he is paid £38,000 of labour across the year, so £7,600 has already gone to HMRC before he sees a penny.

Like a great many subcontractors, he assumes those deductions simply are his tax. They are not. They are a payment on account of a bill that has not been calculated yet.

Why CIS almost always overpays

This is the part that is worth understanding properly, because it explains why refunds are the norm rather than the exception.

CIS is deducted from your labour, before anything else. Before your personal allowance. Before your expenses. It is a flat 20% off the top.

But your actual tax is worked out on profit, after your allowable costs, and only after your personal allowance of £12,570 has been used. So on £38,000 of labour with, say, £6,000 of genuine costs, the profit is £32,000. Take off the personal allowance and roughly £19,430 is taxable at 20%, which is about £3,886, plus Class 4 National Insurance at 6% on profit above £12,570, roughly £1,166. Call it £5,052 due against £7,600 already paid.

That is a refund of roughly £2,500, and nothing unusual has happened. The system is simply built to take too much and give it back.

What gets missed

The refund is only as good as the expenses claimed, and this is where money is routinely left behind.

Deduction statements. You are entitled to one from every contractor, every month they pay you. Without them you cannot evidence what was taken. If you have lost them, they can be reconstructed from your bank statements and by asking the contractor, but it is far easier to keep them.

Tools and equipment. Not just the big purchases. Consumables, replacements, hire.

Mileage. Site to site travel is allowable. Home to a permanent workplace is not, but subcontractors frequently move between sites, which changes the picture. At 55p a mile for the first 10,000 miles, a driver doing 12,000 site miles has a claim worth thousands on its own.

Protective clothing, boots, insurance, professional subscriptions, phone. Individually small. Together, often the difference between a modest refund and a real one.

The approach we would take

Collect a deduction statement from every contractor for the full year and reconcile them to the bank, so the amount deducted is evidenced rather than estimated.

Rebuild the expense position properly rather than accepting a rushed figure, going through the year with the client rather than asking them to guess.

File the return and let HMRC process the repayment. Refunds usually arrive within a few weeks where the return is clean and nothing needs checking.

Then fix the record keeping so next year takes an hour instead of a fortnight, because the second year is always easier than the first if the habits change.

The point of this example

CIS is not your final tax bill. It is a deduction on account, taken before the two things that reduce your bill most: your expenses and your personal allowance. If you have been treating the deduction as the end of the matter, there is a reasonable chance you are owed money.

You can generally go back four years to amend or claim, so a subcontractor who has been under claiming for a while may have more than one year to put right.

If any of this sounds like your situation, get in touch and we will tell you honestly whether it is worth doing.