Making CIS deductions is a legal obligation for any contractor working within the UK Construction Industry Scheme. Under CIS, contractors must deduct a percentage from payments made to subcontractors and pass that amount directly to HMRC as a prepayment toward the subcontractor's tax and National Insurance.
This article walks through the full process from verifying subcontractors and calculating the right deduction rate, to submitting your CIS return and paying HMRC on time.
What Is the Construction Industry Scheme and Who Does It Apply To?
The Construction Industry Scheme (CIS) is an HMRC-administered system that governs how tax is handled for construction work in the UK. Rather than subcontractors self-reporting all their income at year end, CIS requires contractors to deduct tax at source and pay it to HMRC on the subcontractor's behalf.
The scheme applies to two types of contractors. A mainstream contractor is a business primarily engaged in construction work that hires others to carry it out. A deemed contractor is a non-construction business that has spent more than £3 million on construction operations within a rolling 12-month period businesses such as supermarket chains or large property companies often fall into this category.
If you fall into either group, you have legal obligations under CIS: you must verify subcontractors before their first payment, make the correct deductions, file monthly returns, and pay the withheld amounts to HMRC.
What Is a Subcontractor Under CIS?
A subcontractor under CIS is any company or individual hired by a contractor to carry out construction work on a project. They are not an employee, they operate independently and are responsible for their own tax affairs, but the contractor is responsible for deducting CIS tax from payments made to them.
It is important to distinguish subcontractors from employees. If someone is employed directly, PAYE rules apply instead of CIS. Misclassifying a worker can result in penalties from HMRC.
How Do You Verify a Subcontractor Before Making a Deduction?
Before making any payment and before making any deduction contractors must verify each subcontractor with HMRC. Verification tells you whether the subcontractor is registered under CIS and what deduction rate applies to them.
You can verify subcontractors through your HMRC online account, the CIS online service, or by calling the CIS Helpline. You will need the subcontractor's Unique Taxpayer Reference (UTR), their legal name, and their National Insurance number if they are an individual.
HMRC will return one of three statuses:
- Gross payment status: No deduction is made. The subcontractor receives the full payment.
- Standard (registered): Deduct 20% from the labour element of the invoice.
- Higher rate (unregistered): Deduct 30% from the labour element of the invoice.
You must verify every new subcontractor before their first payment. You do not need to re-verify a subcontractor you have paid in the same tax year unless HMRC tells you to.
To qualify for gross payment status, a subcontractor must pass three tests set by HMRC: Business test, Turnover test and a Compliance test.
Read our article on Qualifying conditions for Gross Payment Status to check whether subcontractor is eligible to apply.
How to Calculate CIS Deductions on a Subcontractor Invoice?
Once the rate of deduction is determined, the next step is to calculate the CIS tax amount.
Follow these easy steps to calculate the CIS tax deduction:
1. First, take the total (gross) amount of the subcontractor’s invoice.
2. Subtract the following amounts paid to the subcontractor from the invoice total:
- Value-added Tax (VAT)
- Materials
- Plant hire costs
- Other allowable deduction
3. Multiply the remaining amount by the CIS deduction rate to get the CIS amount.
To delve deeper into the deductions process, let's take a closer look at an example :
For Example,
‘Bob the builder’ is a contractor specialising in developing commercial buildings and infrastructure. He delegates most of his work to subcontractor ‘Shrek and Co’.
‘Shrek and Co.’ sent an invoice amounting to £49,500 (exclusive of VAT) out of which £30,000 is for the construction material, and £19,500 for the labour cost. Shrek and Co. is registered in VAT and CIS at a standard rate.
Details | Price |
|---|---|
Construction Material Cost | £30,000 |
Labour Cost | £19,500 |
Subtotal | £49,500 |
VAT at 20% | £9,900 |
CIS deducted at 20% | £3,900 |
Payment to Shrek and Co. | £55,000 |
What Are the Most Common Mistakes When Making CIS Deductions?
Getting the calculation wrong exposes contractors to penalties from HMRC. The most frequent errors are:
- Deducting from the full invoice total rather than the labour element. VAT and materials must always be excluded before applying the deduction rate.
- Using the wrong deduction rate. If a subcontractor has not been verified, the 30% rate applies. Applying 20% to an unverified subcontractor leaves the contractor liable for the shortfall.
- Failing to verify before the first payment. Verification cannot be backdated. If you pay before verifying and then discover the subcontractor is unregistered, HMRC may hold you responsible for the difference between 20% and 30%.
- Including plant hire in the labour element. Plant hire costs are deductible from the gross invoice before applying CIS, the same as materials.
How to Submit a CIS Return
After making deductions, contractors must file a monthly CIS return (form CIS300) with HMRC. The return must be submitted by the 19th of the month following the tax month in which payments were made.
This means deductions made in the tax month ending 5 April must be reported to HMRC by 19 April.
HMRC charges late filing penalties for returns submitted after the deadline. A return that is one day late incurs a £100 penalty. Returns that are two months late incur a further £200 penalty, with larger penalties applying if the return remains outstanding beyond that point.
If no payments were made to subcontractors in a given month, a nil return must still be submitted unless HMRC has agreed to an inactive period.
How to Pay CIS Deductions to HMRC
Once the CIS return is filed, the contractor must pay the withheld deductions to HMRC.
HMRC sets up a CIS payment scheme automatically when a business registers as a contractor. If the contractor already runs a payroll, HMRC converts the existing PAYE scheme into a combined PAYE/CIS payment scheme. This means both PAYE liabilities and CIS deductions are paid using the same payment reference.
Payments made electronically must reach HMRC by the 22nd of the month. Payments made by post must arrive by the 19th of the month.
If deductions are not paid by the deadline, HMRC will charge late payment interest and may impose penalties, particularly for repeat late payers.
Conclusion
Making CIS deductions correctly depends on three things: verifying subcontractors before the first payment, applying the right deduction rate to the labour element only, and filing and paying on time each month. The process is consistent once you understand it, but the consequences of getting it wrong including incorrect deductions, late penalties, and HMRC compliance action make precision important.
If you would like support managing your CIS obligations, our team works with contractors across the UK to ensure every return is accurate and every deadline is met.
Manage Your CIS with Ease
Let our team of experienced chartered accountants handle your Construction Industry Scheme and streamline your accounting process by ensuring compliance with regulations.
- CIS Deduction by UK Contractors - 13 April 2023
- A Beginner’s Guide to CIS Verification in the UK - 13 April 2023
- Get Acquainted with Capital and Revenue Expenditure - 3 April 2023
