If you work as a subcontractor under the Construction Industry Scheme (CIS), the deductions shown on your payment statements are advance payments towards your tax and National Insurance—not an extra business expense or necessarily your final tax bill. Correct CIS tax returns for subcontractors can turn those deductions into a lower balancing payment or a refund, but only when your income, expenses and deduction records are reported properly.
This guide explains the CIS rates, how contractors calculate deductions, what records you need and how claims differ for sole traders, partnerships and limited companies.
What is the Construction Industry Scheme?
CIS is an HMRC scheme covering certain construction work that subcontractors carry out for contractors. A contractor usually verifies a subcontractor with HMRC before making payment and may then deduct tax from the labour element of the invoice.
Subcontractors should register for CIS if they carry out construction work for a contractor and do not operate through payroll as that contractor’s employee. Registration matters because it normally reduces the deduction rate.
CIS deduction rates for subcontractors
| Status | Deduction rate | What it means |
|---|---|---|
| Registered and verified | 20% | The standard CIS deduction applies to the relevant amount. |
| Not registered or not correctly verified | 30% | The higher rate can apply if HMRC cannot match your details. |
| Gross payment status | 0% | The contractor pays you without CIS deductions; you pay tax through your normal return or company obligations. |
Contractors generally apply a 20% or 30% CIS deduction only to the part of the invoice that is subject to CIS. Before calculating the deduction, they remove VAT and certain qualifying costs, such as direct materials you paid for. Getting this calculation right is important, as mistakes can affect your cash flow and cause differences between your records and HMRC’s information.
How contractors calculate a CIS deduction
The contractor starts with the total payment and removes amounts that should not attract CIS deductions. These can include VAT, direct materials bought by the subcontractor, consumable stores, qualifying plant hire, certain prefabrication or manufacturing costs, and fuel used for work other than travel.
You should exclude only genuine direct material costs. Labour, travel and subsistence are not materials. If an invoice combines labour and materials, show the items clearly and retain the supporting purchase invoices. A vague description such as “labour and materials” makes the deduction harder to check.
A simple example
Suppose a registered subcontractor invoices £3,000 before VAT, including £600 of direct materials. The amount subject to a 20% CIS deduction is £2,400, so the contractor deducts £480. The subcontractor receives the balance, plus any VAT due, but still records the full sales invoice in the accounts. The £480 is recorded separately as CIS tax deducted at source.
Payment and deduction statements
For every tax month in which a deduction is made, the contractor must provide a payment and deduction statement. It should show the contractor and subcontractor details, the gross payment, material costs and the CIS deduction.
The statement must normally be given within 14 days after the end of the relevant tax month. Check it against your invoices and bank receipts as soon as it arrives. An incorrect business name, verification status, gross amount or materials figure can cause problems later.
If a statement is missing, ask the contractor for a replacement. If the contractor has stopped trading or will not respond, keep evidence of the invoice and payment and contact HMRC with the available details.
CIS tax returns for sole traders
A sole trader reports the full amount invoiced as business turnover on the Self Assessment tax return, not merely the cash received after CIS deductions. Allowable business expenses are claimed separately, and CIS deductions are entered as tax already paid.
HMRC then calculates the final Income Tax and National Insurance liability. If CIS deductions exceed the amount due, a repayment may be available. If they are lower than the final liability, the remaining tax is payable by the Self Assessment deadline.
Do not claim the CIS deduction itself as an expense. Doing so can understate both turnover and profit while also claiming the same amount as tax paid.
Partnerships and CIS
A partnership reports its construction income and expenses on the partnership return, while the partners report their shares on their individual returns. CIS deductions must be allocated and claimed consistently. Keep a schedule that links every contractor statement to the relevant invoice, bank receipt and partner allocation.
How limited companies claim CIS deductions
The process is different for a limited company. CIS deductions suffered by the company are normally reported through payroll using an Employer Payment Summary (EPS), alongside the usual Full Payment Submissions where required. The deductions should not simply be entered as a credit on the Company Tax Return.
HMRC can set the CIS amount against the company’s PAYE, National Insurance and other payroll liabilities during the tax year. Unused credit can carry forward within that PAYE year. After the year end, the company can claim a repayment once the relevant payroll submissions, contractor returns (if it is also a contractor) and Company Tax Returns are up to date.
HMRC may use an overpayment against overdue PAYE or Corporation Tax before issuing a refund, and a company may be able to ask for remaining credit to be repaid or set against another liability.
Why CIS refunds happen
Refunds are common where subcontractors have significant allowable expenses, use labour or equipment, have fluctuating profits, or suffer deductions at 30%. A refund is not automatic evidence that the return is correct. HMRC can request invoices, statements and bank records before releasing money.
Large or repeated refund claims deserve careful reconciliation. Differences often arise because statements are missing, payments cross tax years, a contractor reported a different figure, or the subcontractor recorded only net receipts.
Could gross payment status help cash flow?
Gross payment status allows eligible subcontractors to receive payments without CIS deductions. It can improve monthly cash flow, but it does not remove the underlying tax bill. You must still reserve funds for Income Tax, National Insurance or Corporation Tax and meet HMRC’s qualifying and compliance conditions.
Before applying, consider whether your record keeping, filing history and cash-management processes are strong enough to handle larger future tax payments.
Common CIS mistakes to avoid
- Recording only the net bank receipt instead of the full sales invoice.
- Treating CIS tax deducted as an allowable business expense.
- Claiming materials without purchase evidence or including travel as materials.
- Using statements from the wrong tax year.
- Failing to reconcile contractor statements to invoices and bank payments.
- Entering limited-company CIS deductions on the Corporation Tax return instead of through payroll.
- Ignoring 30% deductions caused by incorrect registration or business details.
- Submitting a refund claim before all required returns are filed.
CIS records you should keep
Maintain a clear file for each contractor containing:
- contracts, work orders and verification details;
- sales invoices showing labour, materials and VAT separately;
- purchase invoices for direct materials;
- monthly payment and deduction statements;
- bank statements showing the net receipts;
- a CIS reconciliation by contractor and tax month;
- copies of Self Assessment, payroll and company submissions; and
- correspondence about missing statements or corrected figures.
Good records make the tax return faster, support a refund claim and reduce the risk of delays if HMRC asks for evidence.
Practical year-end checklist
- List every contractor you worked for during the tax year.
- Match each invoice to the bank receipt and deduction statement.
- Confirm that turnover is recorded gross.
- Check materials against purchase invoices.
- Separate CIS deductions from ordinary expenses.
- Investigate missing or duplicate statements.
- Make sure the claim follows the correct route for your business structure.
- Keep funds aside for any remaining liability.
Get help with your CIS return or refund
CIS reporting becomes much easier when the bookkeeping, statements and tax return all agree. Real Key Accountancy can help subcontractors reconcile deductions, prepare accurate returns and deal with repayment claims. If you want us to review your CIS position, contact us.
Frequently asked questions
Are CIS deductions the same as my final tax bill?
No. They are advance payments towards your tax and National Insurance. Your final position depends on your taxable profit, other income, allowances and business structure.
Can I claim a CIS refund without payment statements?
You should first request replacement statements from the contractor and reconcile them to invoices and bank receipts. HMRC may ask for supporting evidence before accepting a claim.
Do I include the full invoice or only what reached my bank?
Include the full business income. Record the CIS deduction separately as tax paid at source.
How does a limited company claim CIS tax suffered?
It normally reports the deductions through payroll using an EPS. It should not simply deduct the amount from Corporation Tax on the Company Tax Return.
Does gross payment status mean I pay no tax?
No. It means contractors do not deduct CIS before paying you. Your tax remains payable through the normal process.
This article provides general information and does not constitute personalised tax advice. CIS treatment can depend on the contract, payment details and business structure.