Contractors who operate in the construction industry might have several areas of tax they need to think about. You’ll have your own tax affairs, but if you’re planning to bring subcontractors onto a construction project, whether for a week, a month, or much longer – you’ll also need a solid grasp of the Construction Industry Scheme (CIS).
In a nutshell, CIS makes you responsible for deducting tax from your subcontractors’ payments and reporting those deductions to HMRC through a monthly CIS return.
In this article we’ll explain how CIS deductions work, and what this means for your own tax reporting so the process feels more manageable!
Do contractors need to register for CIS?
Contractors must register for the Construction Industry Scheme (CIS) if they pay subcontractors for construction work in the UK. The process is very similar to the way an employer signs up for PAYE.
Are CIS deductions mandatory?
Yes CIS deductions are mandatory when contractors hire subcontractors for construction work unless the subcontractor has ‘gross payment status’.
How do I work out CIS deductions?
The amount you need to deduct partly depends on whether or not the subcontractor is registered for CIS, so you’ll need to verify their CIS status using HMRC’s CIS online service before you do anything else.
Verify their CIS status
The documents you need in order to verify them depend on their business structure. For example, if your subcontractor is a:
- Sole trader; you’ll need their National Insurance Number and UTR number
- Limited company; you’ll need their company name, company registration, and UTR numbers
- Partner in a partnership; you’ll need the name of the nominated partner, their UTR number, and the partnership’s trading name
Work out what’s taxable
When the time comes. your subcontractor’s invoice might include several elements, such as:
- VAT
- Materials they paid for themselves
- Equipment hired for the job (for example ‘plant hire’)
- Labour
Some of these are costs that the subcontractor needs to be reimbursed for, so they’re not taxable under CIS.
Basically, your subcontractor’s invoice might include things you need to pay them for, even though they don’t count towards your CIS calculation. You’ll need to deduct them from the total invoice amount before calculating what to deduct for CIS tax.
| When you need to use it | Deduction rate |
| If the subcontractor isn’t registered for CIS, or HMRC can’t verify them | 30% |
| For subcontractors who are registered for CIS | 20% |
| When the subcontractor has gross payment status and no deductions are made | 0% |
Step 1 – Verify their CIS status
Let’s say you’re a contractor who has taken on a kitchen-refit project, and you decide you need to bring in a subcontractor who specialises in plastering.
The subcontractor is a sole trader, so they’ve given you their UTR and National Insurance number. HMRC’s CIS tool confirms they’re registered for CIS, so you’ll need to make any CIS tax deductions at 20%.
Step 2 – Work out what’s taxable
The subcontractor sends you their invoice for a total amount of £1,500, and it includes:
- £1,200 labour
- £300 materials (with receipts provided)
- £0 VAT (they’re not VAT registered)
You’ll apply CIS to the labour, not the materials they paid for, so the CIS calculation is based on £1,200.
What you need to pay to HMRC
20% of £1,200 = £240. This is the amount you need to deduct from their invoice and pay to HMRC for CIS on their behalf.
What you need to pay to your subcontractor
You’ll reimburse your subcontractor the £300 materials they paid for, plus £960 (which is the £1,200 labour minus the £240 CIS tax). The total amount you send to them is £1,260.
Step 3 – Reporting to HMRC
Send a CIS Return to tell HMRC about your subcontractors’ pay and deductions by the 19th after the tax month ends. For example, you need to send a return for the tax month 6th May to 5th June, so it must reach HMRC by 19th June, and you’ll need to send the £240 you deducted to HMRC by the 22nd.
You’ll need to give your subcontractor a CIS statement showing what they were paid and what you deducted. They’ll need this information for their own tax return later.
How do I pay the CIS deductions I’ve taken to HMRC?
HMRC will set up a payment reference when you register for CIS as a contractor, so you’ll use this to send CIS deductions you take from your subcontractors. It’s your responsibility to ensure the right amount reaches HMRC by the 22nd of each month (or by the 19th if you’re sending the payment by post).
What about the tax I owe HMRC as a contractor?
You’ll still need to keep records of your own tax affairs, and send tax returns depending on your business structure.
Whether you’re a sole trader or limited company, the payments you make to subcontractors (and the CIS you pay to HMRC) are classed as allowable business expenses, so you can offset these against your own tax bill.
Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote. You can also find more guides and templates in our resource centre for contractors.
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