CIS explained for construction subcontractors: deductions, verification and getting your money back

You invoiced for a fortnight of groundworks. The payment landed three hundred pounds short of the figure on your invoice, there was a statement attached that you did not read closely, and the office said something about CIS.

Or the worse version: the payment came up nearly a third short, because you were deducted at 30% rather than 20%, and nobody told you that the only thing standing between those two numbers was a five-minute registration you had not got round to.

The Construction Industry Scheme catches out a lot of capable subcontractors, and it costs them real money — sometimes in a deduction rate they did not need to be on, more often in a refund they never claimed. It is worth thirty minutes of your attention.

What CIS actually is#

CIS is not a tax. It is a deduction scheme.

When a contractor pays you for construction work, they are required to take a slice off your invoice and send it to HMRC on your behalf, before the money reaches you. That slice is a payment on account against the tax you will eventually owe. It is not a final tax bill, and it is not a fee.

At the end of the tax year you file a self assessment return, HMRC works out what you actually owe on your profits after your allowable costs, and the CIS deducted through the year is set against it. If the deductions came to more than your liability — which they very often do, because the deduction takes no account of your expenses, your personal allowance, or a quiet winter — HMRC owes you the difference.

You remain self-employed throughout. CIS does not make you an employee and it brings no holiday pay, sick pay or pension with it.

The three rates, and which one you are on#

20% — registered and verified. You are registered with HMRC for CIS as a subcontractor, and the contractor paying you has verified you against HMRC's records. This is the standard rate and where most subcontractors sit.

30% — unregistered, or unverifiable. Either you never registered, or the contractor tried to verify you and the details did not match.

The second cause is the one that quietly costs people money. Verification fails for dull reasons: the office typed your name with the wrong spelling, they submitted your trading name instead of the name HMRC holds you under, a digit of your UTR is wrong, or your National Insurance details do not match. The system does not distinguish between a subcontractor who never registered and one whose paperwork has a typo in it. Both get 30%.

0% — gross payment status. You are paid in full and settle your own tax through self assessment. To hold it you need to pass three tests:

• The business test. A genuine UK construction business: registered for self assessment, a UK bank account through which the business runs, premises or a fixed workplace, and work that counts as construction operations.
• The turnover test. Construction turnover excluding VAT and materials of at least £30,000 in the previous twelve months if you are a sole trader. For a partnership or a company, either £30,000 per partner or director, or £100,000 in total.
• The compliance test. Your tax obligations met on time for the past twelve months — self assessment, CIS returns, PAYE and VAT where they apply. There is a small amount of tolerance for minor slips, but it is small.

HMRC reviews gross payment status roughly six months after granting it and then annually, and it can be withdrawn. A handful of late payments or a missed CIS return is enough. If you hold gross status, treat your filing deadlines as the price of keeping it.

Labour only: what the deduction does and does not touch#

The deduction is tax paid on account, not your final bill. The take-home comparison shows, for a construction rate, what is deducted during the year and roughly what comes back or is still due at self assessment.

This is where subcontractors leave the most money on the table, because the deduction applies to labour only.

Outside the deduction:

• materials you bought for the job
• plant you hired for the job
• consumable stores
• manufacturing or prefabricating materials
• VAT, where you are VAT-registered

Inside it, and commonly assumed to be outside:

• your tools
• protective clothing and safety equipment
• fuel for your vehicle

So if you invoice £4,000 with £1,200 of materials properly identified, the deduction bites on £2,800, not on £4,000. At 20% that is £560 rather than £800 — £240 of your money, on one invoice, resting on whether you itemised the materials or not.

Itemise them. Every time. Keep the receipts, and put the split on the face of the invoice rather than expecting the contractor's office to work it out for you.

The paperwork you are owed, and the paperwork you owe#

Owed to you: a payment and deduction statement for every tax month in which you were paid, given to you within 14 days of the end of that tax month. It should show the gross amount, the cost of materials, and the amount deducted.

Keep every one. They are the evidence for your refund. A subcontractor who arrives at their accountant in April with a shoebox of statements gets the refund; one who arrives with a rough idea usually does not get all of it.

Owed by you: a self assessment return each year, and honest records of your costs. If you are also paying subcontractors yourself, you are a contractor for CIS purposes too, with monthly returns due by the 19th of the month following the tax month, and penalties that start at £100 and escalate.

What to check this week#

• Are you registered with HMRC for CIS as a subcontractor? If you are being deducted 30%, start here.
• If you are registered and still on 30%, ring the contractor's office and check the exact name, UTR and NI number they submitted for verification. Get them to resubmit.
• Are materials itemised separately on every invoice you raise?
• Do you hold a payment and deduction statement for every month you were paid this tax year? Chase the missing ones now, not next April.
• Have you filed a self assessment return for every year you have worked under CIS? If there are unfiled years, there may be refunds sitting there.
• If you are approaching £30,000 of construction turnover and your filing is clean, is gross payment status worth applying for?

Where CIS is not the answer#

CIS is a deduction scheme for genuinely self-employed subcontractors. It is not a way of making an employment relationship cheaper, and it does not decide employment status — the facts of the working arrangement do that.

If you turn up when you are told, use the contractor's plant, take direction on how the work is done, and have no real ability to send someone else in your place, you may not be self-employed at all, whatever the paperwork says. That exposes both you and the contractor. Where that is the picture, a PAYE route is the honest answer, and the comparison is set out in how self-employed contractors get paid in the UK.

Gross payment status is also not automatically better. It improves your cash flow and hands you the full tax bill in one piece, twice a year, on dates that will not move. If your record-keeping is shaky or your winters are lean, 20% deducted at source is a blunt but effective savings scheme, and plenty of subcontractors are better off leaving it alone.

And no payroll arrangement raises a rate that is too low. That is a conversation with the agency about the rate.

How Freelancer Supermarket helps#

We are an independent consultancy and an introducer. We are not a payroll company, we are not your employer, and we do not run CIS payroll ourselves.

What we do is work out which route fits the way you actually work — CIS, PAYE through an agency, employed PAYE through a payroll provider, or your own company — and introduce you to two or three providers from a panel we have checked. A shortlist with a reason attached to each name, not a directory to scroll through.

It costs you nothing. The provider you engage pays us, and we are paid the same whichever one you choose, so we have no reason to steer you. If your current arrangement is already right, we will say so and leave it alone.

We also place people. Groundworkers, plant operators, civils and site staff are among the trades we recruit for most, and finding you work and sorting out how you get paid usually happen in the same conversation. More on the sector at construction and CIS.