CIS deductions explained

What CIS is

The Construction Industry Scheme (CIS) is how HMRC collects tax from self-employed people working in construction. When a contractor — a builder, developer or any business paying others to do construction work — pays a subcontractor, it takes a deduction from the payment and sends it to HMRC.

It doesn't matter whether the contractor is a big firm or a sole trader who brings in help. If they pay someone else for construction work, CIS applies.

CIS isn't an extra tax. Every pound deducted is credited to you as tax already paid. At the end of the year your Self Assessment works out your real bill on your profit, and the CIS taken is set against it. If too much was taken, you get it back — see how to claim a CIS refund.

The three rates

Most subbies should be on 20%. If you see 30% on your statements, register straight away and give the contractor your exact name, business name (if any) and UTR so they can verify you again. The extra 10% isn't lost — it's still credited when you file — but it ties up your money for months.

What CIS is taken on — and what it isn't

The contractor should work out the deduction on the labour part of the payment only. Before applying the rate, they take out:

• VAT — CIS is never charged on VAT;
• materials you bought for the job;
• plant hire;
• consumables such as nails, screws, sealant or adhesive.

That's why it pays to show materials separately on every invoice. If you don't, the contractor may deduct CIS from the whole amount.

Worked example

Sam is a registered electrician. He sends an invoice for £2,500: £2,000 labour and £500 of cable, sockets and fittings he bought for the job.

In the second column Sam has £100 too much taken. He'll get it back when he files, but over a year it can add up to thousands. If Sam weren't registered, the correct deduction would be 30% × £2,000 = £600.

What about VAT?

If you're VAT registered, most work you do for a VAT-registered contractor falls under the domestic reverse charge: you don't charge VAT on the invoice, and the contractor accounts for it instead. CIS still applies to the labour as normal. Either way, CIS is never worked out on a VAT amount. Our VAT guide for tradespeople covers the reverse charge in detail.

Your monthly statements

CIS works on tax months, which run from the 6th of one month to the 5th of the next. The contractor files a monthly return to HMRC by the 19th, and must give you a payment and deduction statement for every tax month they took CIS from you. It should show:

• the contractor's name and employer reference;
• your name and UTR (or verification number);
• the gross amount paid, the cost of materials, and the amount liable to deduction;
• the amount deducted.

Keep every one. They're your evidence of tax paid, and you'll need the totals for your tax return. Paper or electronic is fine. See what CIS records to keep.

Checking your deductions

Once a month, check each statement against your invoice:

1. Does the gross amount match what you invoiced, excluding VAT?
2. Are materials shown, and taken out before the deduction?
3. Is the rate right — 20% if you're registered?
4. Does the deduction match? Labour × 20% should equal the CIS figure, give or take a penny.

If something's wrong, ask the contractor to correct it. Contractors can correct mistakes on later returns. Whatever happens, your tax return uses the figures actually deducted, and HMRC checks them against what contractors reported.

Gross payment status

With gross payment status, contractors pay you in full and you pay your tax through Self Assessment like any other sole trader. It's good for cash flow, but it means you need to put tax aside yourself.

To qualify as a sole trader you need to pass three tests:

• Turnover: at least £30,000 of construction work in the last 12 months, excluding VAT and the cost of materials. Partnerships and companies have their own figures.
• Compliance: you've filed returns and paid tax on time. A small number of late items may be allowed.
• Business: you run the business through a UK bank account.

HMRC reviews gross payment status every year and can remove it if you stop meeting the tests. If your application is refused or your status is removed, you normally have to wait a year before applying again.

CIS when you're employed

CIS only covers self-employed subcontractors. If a contractor controls how, when and where you work, provides your tools and pays you by the hour with no risk of loss, you may really be an employee. Employees should be paid through PAYE with holiday pay and other rights, not under CIS. If you're not sure, use HMRC's employment status tool on GOV.UK.