CIS deductions explained

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

How CIS works, step by step

1. Registration. Contractors register as contractors, subcontractors register to get the 20% rate instead of 30%.
2. Verification. Before paying, the contractor verifies each subcontractor with HMRC to confirm the deduction rate.
3. Deduction. The contractor deducts 20% or 30% from the labour part of each payment and pays it to HMRC.
4. Statements. The subcontractor receives a deduction statement showing what was taken.
5. Reclaim. Because CIS is deducted before expenses and allowances, subcontractors often overpay and reclaim after the year end.

Getting back what you are owed

Sole trader subcontractors reclaim overpaid CIS through their Self Assessment return. Companies offset it against other payroll taxes or reclaim from HMRC. Either way, keeping every deduction statement is what makes a smooth, full reclaim possible.

The three rates, and which one applies to you

A contractor takes money off before paying a subcontractor, and how much depends entirely on the subcontractor's status with HMRC.

• 20% if the subcontractor is registered under CIS. This is the normal position.
• 30% if the subcontractor is not registered, or HMRC cannot verify them.
• 0% if the subcontractor holds gross payment status.

The difference between 20% and 30% is entirely down to registering, which costs nothing. A subcontractor turning over £60,000 of labour who has not registered is handing HMRC an extra £6,000 up front for no reason. It comes back eventually, but only after the tax return.

What the deduction is actually applied to

This is where money is lost, and it is lost by the subcontractor who does not itemise properly.

The deduction applies to the labour element only. Before working out 20% or 30%, the contractor takes off:

• VAT charged on the invoice, always
• Materials the subcontractor paid for directly
• Plant hire brought in for the job
• Consumable stores and manufacturing or prefabricating costs
• Fuel used, though not fuel for travelling

So an invoice of £5,000 made up of £2,000 materials and £3,000 labour carries a deduction of £600, not £1,000. If you do not show the materials separately on the invoice, the contractor deducts on the whole thing and you have lent HMRC £400 until your tax return.

Where the domestic reverse charge applies you charge no VAT, so there is no VAT to strip out, but the materials and labour split works exactly the same way.

Deadlines, for contractors

If you are the one making deductions, two dates matter every month.

• The monthly return is due by the 19th of each month, covering the tax month that ran from the 6th to the 5th.
• The money is due by the 22nd if you pay electronically, or the 19th if you pay by post. It goes over with your PAYE and National Insurance.

You must file a return even in a month where you paid no subcontractors, or tell HMRC you are making no return for that period.

The late filing penalties, which escalate quickly

• 1 day late: £100
• 2 months late: £200
• 6 months late: £300 or 5% of the deductions on the return, whichever is higher
• 12 months late: a further £300 or 5%, whichever is higher
• Beyond 12 months: in serious cases up to £3,000 or 100% of the deductions

These are per return, per month. Three missed months is three sets of penalties, not one. There is also a penalty of up to £3,000 for getting a subcontractor's employment status wrong on the return.

Getting the money back

If you are a sole trader, the deductions suffered are set against your Income Tax and Class 4 National Insurance on your tax return. Most subcontractors are due a refund, because 20% of gross labour is usually more than the tax actually owed once expenses and the personal allowance are taken into account.

If you trade through a limited company, the deductions are reclaimed through your payroll scheme against PAYE and National Insurance owed, not through the Corporation Tax return. Getting this wrong is one of the most common causes of a company sitting on a CIS balance for a year.

Either way, keep every payment and deduction statement. The contractor must give you one within 14 days of the end of the tax month, and without them a claim is difficult to support.

Gross payment status, and the 2024 tightening

Gross payment status means being paid in full with no deduction. Three tests must all be met: a business test, a turnover test and a compliance test.

The turnover test looks at net construction turnover in the last 12 months, ignoring VAT and materials: £30,000 for a sole trader, £30,000 per partner or director, or £100,000 for the partnership or company as a whole.

The compliance test changed on 6 April 2024 and this catches people out. VAT filing and payment obligations are now part of it, where before it covered only CIS, PAYE, Self Assessment and Corporation Tax. HMRC also gained the power to cancel gross payment status immediately where it suspects fraud, and the first compliance review after applying was brought forward from 12 months to 6 months.

In practice that means a late VAT return can now cost you gross payment status, which is a far bigger problem than the penalty on the return itself.

Frequently asked questions