Question 1

What is CIS and does it apply to me?

Accepted Answer

The Construction Industry Scheme requires contractors to deduct tax from payments to subcontractors and pay it to HMRC on their behalf. It applies if you pay subcontractors for construction work, and it applies whether you are a builder, a developer, or a business outside construction that spends heavily on it. Construction operations are defined broadly — site preparation, alterations, demolition, installation of systems, decorating, repairs — but there are carve-outs that surprise people, including architecture and surveying, carpet fitting, and manufacturing materials off site. If you are a subcontractor being paid for construction work, you are in it from the other side and will have deductions taken from your payments. Being registered matters: it is the difference between 20% and 30% coming off.

Question 2

How much do I deduct from a subcontractor?

Accepted Answer

20% if they are registered with HMRC, 30% if they are not, and nothing at all if they hold gross payment status — but you do not choose which, you verify. Every new subcontractor must be verified with HMRC before their first payment, and HMRC tells you the rate to apply. Guessing is not an option: deduct 20% from someone HMRC would have told you to deduct 30% from and you owe the difference yourself. Crucially, the deduction applies only to the labour element. Materials, plant hire, and VAT are excluded, so an invoice of £5,000 labour plus £3,000 materials at 20% produces a £1,000 deduction, not £1,600. Subcontractors who do not itemise materials will have deductions taken from the whole amount, which is an expensive way to save typing.

Question 3

When are CIS returns due and what happens if I am late?

Accepted Answer

Monthly, by the 19th of the month following the tax month, which runs from the 6th to the 5th. So the month ending 5 June is due by 19 June. The penalties are unusually harsh for how small the obligation feels: £100 the day you are late, £200 at two months, and then £300 or 5% of the deductions at six and twelve months. Those stack, and they are per return — a contractor who quietly stops filing for a year can accumulate thousands owing nothing in tax. You must file a nil return if you paid no subcontractors in a month, or tell HMRC you are inactive, because HMRC expects a return and penalises its absence rather than its content. That is where most CIS penalties come from.

Question 4

How do I get my CIS deductions back?

Accepted Answer

It depends on your structure, and the difference is significant for cash flow. A sole trader or partner reclaims through Self Assessment: the deductions are credited against your tax bill, and because 20% of gross labour usually exceeds the tax actually due on the profit, most subcontractors end up owed a refund each year. Limited companies cannot do that. A company offsets CIS suffered against its own PAYE liabilities through the EPS each month, and only claims a repayment after the tax year end if a balance remains. This catches out subcontractors who incorporate: money that used to come back annually via your return now sits with HMRC until it can be offset, and a company with no payroll to offset against waits until April.

Question 5

What is gross payment status and how do I get it?

Accepted Answer

Gross payment status means contractors pay you in full with no deduction, and you settle your tax through your return instead. For a subcontractor it transforms cash flow — instead of 20% of every payment sitting with HMRC until you reclaim it, you hold the money. To qualify you must pass three tests: a business test showing you run a genuine construction business through a bank account, a turnover test measured against thresholds that vary by structure, and a compliance test requiring that you have filed and paid everything on time in the last twelve months. The compliance test is the one that bites, and it applies continuously — HMRC reviews status annually and will withdraw it for a pattern of lateness. Losing it costs far more than the late return that triggered it.

Question 6

Am I a deemed contractor even though I am not a builder?

Accepted Answer

Possibly, and this is the CIS trap that catches businesses who have never thought of themselves as construction. If your business is outside construction but your spend on construction operations exceeds £3 million in any rolling twelve-month period, you become a deemed contractor and must operate CIS on payments to subcontractors like any builder. It applies to property investors, large landlords, retailers doing a fit-out programme, manufacturers extending a site. The rolling twelve-month test means it can arrive unannounced during a big project. Once in, you must register, verify subcontractors, deduct, and file monthly returns, with the same £100-a-month penalties. There are exclusions for work on your own premises for your own use, which is where careful analysis pays.

Question 7

What is the CIS reverse charge and how does it interact?

Accepted Answer

The VAT domestic reverse charge applies to construction services between VAT-registered businesses where the recipient is CIS-registered and is not the end user. The supplier does not charge VAT; the customer accounts for it instead. The two schemes overlap but are not the same — CIS is about income tax deducted from labour, the reverse charge is about VAT — and a supply can be within one and not the other. The practical effect on subcontractors is a cash flow hit: you no longer hold VAT between invoicing and your return, and many find themselves in a permanent repayment position, which is a good reason to switch to monthly VAT returns. The recurring dispute is whether your customer is an end user, and you want their confirmation in writing.

Question 8

Do I have to give my subcontractors a statement?

Accepted Answer

Yes — a payment and deduction statement for every subcontractor you deducted from, within 14 days of the end of the tax month. It must show your details, theirs, the gross payment, the cost of materials, and the amount deducted. Subcontractors need it to prove what was taken, so failing to issue one leaves them unable to reclaim correctly and creates a dispute you will have to resolve later anyway. Gross payment status subcontractors need no statement, since nothing was deducted. Keep copies: if HMRC reviews your CIS operation, the statements are how you evidence what you did. Most software generates them from the return automatically, which is the easiest way to make sure it happens on time rather than when someone chases.

Question 9

What CIS records do I need to keep?

Accepted Answer

Enough to reconstruct every payment and deduction: gross amounts, the materials element, the deduction, verification numbers for each subcontractor, and copies of the statements you issued. Keep them for at least three years after the end of the tax year, though we would keep them alongside your other records for the usual longer period, since HMRC compliance reviews on CIS are common and go back further than people expect. The material weakness we see most is the materials split — a contractor who cannot evidence why an invoice was treated as part labour and part materials will find HMRC treating the whole thing as labour and charging the deduction that should have been made, plus interest. Get the split onto the invoice, not into a conversation you half remember.

Question 10

Does MTD change anything for CIS?

Accepted Answer

CIS itself is untouched — monthly returns, verification and deductions all work exactly as they do now, and MTD does not reach them. What changes is your own income reporting. If you are a self-employed subcontractor with qualifying income above the threshold, you are in MTD for Income Tax on the usual dates, so your trade goes into quarterly updates and a final declaration. The interaction worth knowing about is that CIS deductions suffered are credited at the final declaration, not through the quarterly updates, so the estimated tax figure your software shows during the year will look far too high if it ignores the 20% already taken from every payment. That surprises subcontractors, and it is why we set expectations before the first quarter rather than after it.

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