Tax months, not calendar months
CIS runs on tax months that begin on the 6th and end on the 5th, exactly like PAYE. The month running 6 June to 5 July is reported by 19 July and paid by 22 July.
Getting this wrong is the most common error a new contractor makes. A payment made to a subcontractor on 3 July belongs to the tax month ending 5 July, not the one ending 5 August, so it must appear on the return filed by 19 July. Two days later and it would fall into the next month.
The date that matters is the date of payment, not the date of the invoice and not the date the work was done. A subcontractor who invoices in May and is paid in July appears on the July return.
The contractor's monthly return
Every month you must tell HMRC who you paid, how much, and how much you deducted. The return covers all payments to subcontractors within the tax month, whether they were paid at 20%, 30% or gross.
The return also carries a declaration that you have considered the employment status of every subcontractor listed. That declaration is not a formality. If HMRC later decides somebody was really an employee, the contractor is liable for the tax and National Insurance that should have been operated, and the declaration is used as evidence that you were asked and said yes.
Nil returns are compulsory
This is where most penalties come from, and it feels deeply unfair to those who are caught by it. If you are registered as a contractor and you paid no subcontractors in a month, you must still file a return saying so.
The reason is simple from HMRC's point of view. It cannot distinguish between a contractor who paid nobody and a contractor who paid people and did not tell it. So silence is treated as a missing return and the penalty applies.
There is a way out. If you know you will not be using subcontractors for a while, you can tell HMRC that your scheme is temporarily inactive, which suspends the requirement for up to 6 months. After that the obligation resumes automatically, so it needs revisiting.
A builder who takes on subcontractors for one project a year, and forgets to file nil returns for the other eleven months, can accumulate over £1,000 in penalties without ever having deducted a penny.
The penalties
The CIS penalty regime escalates faster than almost any other. One day late brings £100. Two months late brings a further £200. Six months late brings £300 or 5% of the deductions on the return, whichever is greater. Twelve months late brings the same again, and can be higher still where information has been deliberately withheld.
Those figures are per return, not per year. A contractor who has missed six monthly returns is facing six separate sets of penalties running in parallel.
There is one piece of relief. A contractor filing their first return, who has never filed before, has the total penalties capped at £3,000. That prevents a brand new business from being wiped out by a paperwork failure, but it applies only to those first returns.
Paying the deductions over
The money you deducted belongs to HMRC, and the payment dates follow the ordinary PAYE rules. Electronic payment must clear by the 22nd of the month, and cheques must arrive by the 19th.
If you also run a payroll, the CIS deductions and the PAYE are paid together as one figure using the same reference. That simplicity is helpful but it also means a shortfall in one shows up as a shortfall in the other.
Late payment penalties work on the same sliding scale as PAYE, starting at 1% of the amount late once you have defaulted more than once in a tax year and rising to 4% for persistent lateness, with further charges at 6 and 12 months and interest running throughout.
Statements to subcontractors
Within 14 days of the end of each tax month you must give every subcontractor you deducted from a payment and deduction statement. For the month ending 5 July that means by 19 July.
This matters enormously to the subcontractor, because it is their evidence of tax already paid. Without it they struggle to reclaim what is owed to them, and a subcontractor who cannot prove their deductions can end up paying tax twice.
Contractors who are casual about statements cause real hardship at the other end of the chain, and it is one of the quickest ways to lose good subcontractors. Issuing them automatically from your software the moment the return is filed removes the problem entirely.
Verification before you pay
Before paying a new subcontractor you must verify them with HMRC. Verification tells you which rate to apply, and it is a genuine obligation rather than a suggestion.
A subcontractor registered under CIS is deducted at 20%. One who is not registered, or who cannot be matched, is deducted at 30%. One with gross payment status is paid in full with no deduction.
Verification lasts for the current tax year and the two following ones, provided you continue to include the subcontractor on returns. If a subcontractor has not been paid for two full tax years, they must be verified again before the next payment.
The subcontractor side
Subcontractors have no monthly obligation at all, which surprises many of them. Their deadline is the ordinary Self Assessment one, 31 January following the end of the tax year.
Most subcontractors are owed a refund. The 20% deducted takes no account of the personal allowance, which means the first slice of income has been taxed when it should not have been, and it takes no account of expenses such as tools, materials, mileage, protective clothing or public liability insurance.
A subcontractor earning £35,000 with £6,000 of legitimate expenses will typically have had £7,000 deducted against an actual liability of a good deal less, and the difference comes back once the return is filed. That is why filing early in the tax year, from 6 April onwards, is worth doing rather than waiting until January. The refund arrives months sooner.
Subcontractor companies
Where the subcontractor is a limited company, the deductions cannot be reclaimed through Self Assessment. Instead they are set against the company's own PAYE and CIS liabilities each month, claimed through an Employer Payment Summary.
The EPS deadline is the 19th of the following tax month, and the claim must be made in the right month. Claiming late, or claiming amounts that do not match what HMRC has recorded from the contractor's returns, is the most common cause of CIS disputes for small construction companies.
Any surplus left at the end of the tax year can be repaid or set against corporation tax, but only once the final EPS for the year has been submitted after 5 April.
Gross payment status
Gross payment status removes deductions entirely and transforms cash flow. To qualify a business must pass a turnover test, a business test and a compliance test.
The compliance test is where deadlines become critical, because it looks at whether you have filed and paid everything on time over the previous 12 months. A single late CIS return or a late corporation tax payment can cost you the status, and HMRC reviews it annually.
Losing gross payment status means going from receiving 100% of your invoices to receiving 80%, overnight, on every job. For a business turning over £500,000 that is £100,000 of working capital gone until the year end. Meeting deadlines is therefore not an administrative nicety in construction, it is directly a cash flow decision.
What counts as a deductible payment
The deduction is applied to the labour element only, not to the whole invoice. Materials, plant hire paid for by the subcontractor, and certain other direct costs come out before the percentage is applied, provided they are shown separately and are genuine.
Take a subcontractor invoicing £4,000, made up of £3,000 labour and £1,000 materials. At 20% the deduction is £600, being 20% of the labour only, not £800. The subcontractor receives £3,400.
Contractors who deduct from the full invoice are over deducting, which leaves the subcontractor out of pocket until the year end. Contractors who accept inflated materials figures without evidence are under deducting, and HMRC will pursue the contractor for the shortfall rather than the subcontractor. Asking for the materials invoices is the only safe position.
VAT is always excluded from the calculation. Where the domestic reverse charge applies, which it does on most construction services between VAT registered businesses, no VAT appears on the invoice at all, and the CIS deduction is still calculated on the labour element as normal.
A worked month for a contractor
Kirkby Contracts pays three subcontractors during the tax month running 6 September to 5 October. One is verified at 20% and invoices £5,000 labour. One is unregistered and deducted at 30% on £2,000 labour. One holds gross payment status and invoices £8,000.
The deductions are £1,000 and £600, totalling £1,600. Nothing is deducted from the third. All three still appear on the return, because gross payment subcontractors must be reported even though no deduction was made.
The return is due by 19 October. The £1,600 must reach HMRC by 22 October. Statements go to the two subcontractors who suffered deductions by 19 October. Filing on the 15th and paying on the 20th leaves comfortable room for a weekend or a banking delay.
Registering as a contractor
You must register as a contractor before you make your first payment to a subcontractor, not afterwards. The obligation applies to any business paying subcontractors for construction work, and also to businesses outside construction that spend more than £3 million on construction in a 12 month period.
That second rule catches property investors, large retailers and anyone undertaking a substantial building programme. They rarely think of themselves as contractors, but once the threshold is crossed the monthly returns, the verification and the penalties all apply in exactly the same way.
CIS handled every month
We file your monthly returns on time, including nil returns, issue subcontractor statements automatically and protect your gross payment status. For subcontractors, we file early so the refund arrives sooner.
Frequently asked questions
When is the CIS return due?
By the 19th of each month, covering the tax month that ended on the 5th. The return for the month running 6 June to 5 July is due by 19 July.
Do I need to file a CIS return if I paid no subcontractors?
Yes. A nil return is required unless you have told HMRC in advance that your scheme is temporarily inactive, which suspends the requirement for up to 6 months.
What is the penalty for a late CIS return?
£100 at one day late, a further £200 at 2 months, then £300 or 5% of the deductions at 6 months and the same again at 12 months. Penalties apply per return, so several missed months multiply quickly.
When must I give subcontractors their CIS statements?
Within 14 days of the end of the tax month, so by the 19th. Without the statement a subcontractor cannot easily prove the tax already deducted from them.
How do subcontractors get their CIS deductions back?
Individuals reclaim through their Self Assessment return, where a refund is usually due because the 20% takes no account of the personal allowance or expenses. Limited companies claim through an Employer Payment Summary each month instead.