CIS for Contractors and Subcontractors: What Construction Businesses Need to Know

If you work in construction, you have probably come across the Construction Industry Scheme (CIS). But understanding exactly how CIS works — and keeping the records behind it organised — can sometimes be more difficult than expected.

Whether you are a contractor paying subcontractors or a subcontractor having CIS deducted from your payments, mistakes can affect your cash flow, tax position and HMRC compliance.

This guide explains some of the key CIS responsibilities construction businesses should understand.

What is the Construction Industry Scheme?

The Construction Industry Scheme is an HMRC scheme governing certain payments made by contractors to subcontractors carrying out construction work.

Under CIS, contractors may need to deduct money from payments made to subcontractors and pay those deductions to HMRC.

For subcontractors, these deductions are not simply an additional tax charge. They generally count as advance payments towards their tax and National Insurance liabilities.

CIS can apply to businesses operating as sole traders, partnerships and limited companies.

Are you a contractor or a subcontractor?

Understanding your position is important because your responsibilities are different.

If you are a contractor

You may need to register as a CIS contractor if you pay subcontractors to carry out construction work. Your responsibilities can include:

• registering for CIS;

• considering the employment status of workers;

• verifying subcontractors with HMRC;

• applying the deduction rate provided by HMRC;

• calculating CIS deductions correctly;

• providing payment and deduction statements;

• maintaining appropriate CIS records;

• submitting monthly CIS returns; and

• paying deductions to HMRC.

Some construction businesses can be both a contractor and a subcontractor.

For example, your company might carry out work for a larger main contractor while also employing subcontractors to complete parts of your own projects.

In that situation, it is particularly important to keep CIS deductions suffered and CIS deductions made from subcontractors properly recorded and reconciled.

What are the CIS deduction rates?

The rate depends on the subcontractor's CIS status. The current rates are generally:

20% – registered subcontractor

A subcontractor who is registered for CIS and successfully verified will normally have deductions made at 20%.

30% – higher deduction rate

The higher rate can apply where the subcontractor cannot be successfully verified or is not appropriately registered.

0% – gross payment status

A subcontractor with gross payment status can receive qualifying payments without CIS deductions. They remain responsible for their own tax obligations.

Contractors should not simply assume which percentage to use. The subcontractor should be verified where required and the deduction treatment should follow HMRC's verification result.

CIS is not necessarily deducted from the whole invoice

This is an area where mistakes can easily occur.

CIS deductions are generally calculated on the relevant payment after excluding certain amounts, including VAT and qualifying amounts relating to materials and certain other items.

For example, if a subcontractor's invoice contains both labour and materials, it does not automatically mean CIS should be calculated on the full invoice value.

The contractor needs appropriate information to calculate the deduction correctly. Good invoices and supporting records therefore matter.

Why should subcontractors keep their CIS statements?

If CIS has been deducted from your payments, your contractor should provide you with a payment and deduction statement.

These statements provide important evidence of:

• payments made to you; and

• CIS deductions taken from those payments.

Do not wait until your year-end before trying to collect them.

A good practice is to reconcile your CIS statements against your bookkeeping records regularly. If your accounting records show £8,000 of CIS deductions suffered but the statements you hold support only £6,500, the £1,500 difference should be investigated rather than automatically treated as recoverable CIS.

Missing or incorrect records can create problems when preparing your accounts and tax returns.

CIS deductions are not your turnover

Another common bookkeeping problem is recording only the amount that reaches the bank.

For example, suppose a subcontractor invoices a contractor and CIS is deducted before payment. The amount arriving in the bank is therefore lower than the gross income earned.

Simply recording the bank receipt as sales can understate turnover and fail to record the CIS deduction separately.

Your bookkeeping should distinguish appropriately between the underlying income, qualifying CIS deduction and actual cash received.

What about materials?

Materials require particular attention.

Where a subcontractor supplies qualifying materials themselves, the relevant material cost can affect the amount on which CIS is calculated.

Contractors should therefore maintain adequate records and may need evidence supporting material costs.

Poorly prepared invoices that simply show one overall figure for "labour and materials" can make CIS calculations and record keeping more difficult.

Contractors have monthly responsibilities

CIS is not something that should only be considered when preparing annual accounts.

Contractors generally have ongoing responsibilities, including verifying relevant subcontractors, making appropriate deductions, providing statements, maintaining records and submitting CIS returns to HMRC.

A monthly bookkeeping process can make these obligations significantly easier to manage.

Rather than reconstructing twelve months of CIS activity at year-end, the business can regularly reconcile:

• subcontractor invoices;

• payments;

• material costs;

• CIS deductions;

• payment and deduction statements;

• CIS returns; and

• amounts payable to HMRC.

Five practical CIS habits for construction businesses

1. Verify new subcontractors before making relevant payments

Do not rely solely on what rate the subcontractor tells you they normally receive.

2. Keep subcontractor records organised

Maintain invoices, verification details, payment records and deduction statements.

3. Separate labour and materials clearly

Clear invoicing helps support accurate CIS calculations.

4. Reconcile CIS every month

Your bookkeeping, CIS records, statements and HMRC submissions should be capable of being reconciled.

5. Deal with differences early

If a CIS figure does not agree with your records, investigate it while the information is still readily available rather than waiting until the year-end tax return.

Good CIS bookkeeping is about more than compliance

For a construction business, well-maintained CIS records can also improve the quality of the wider accounting records.

You can have a clearer picture of what customers owe you, what you owe subcontractors, how much CIS has been deducted from your income, how much you have deducted from subcontractors and what needs to be paid to HMRC.

That makes year-end accounts and tax preparation considerably easier.

Need help with your construction accounts?

Hamish Accountancy Ltd is a Glasgow-based AAT Licensed Accountancy Practice specialising in accounting support for construction businesses, contractors and subcontractors.

We can support construction businesses with:

• CIS bookkeeping and returns;

• monthly bookkeeping;

• VAT returns;

• payroll;

• annual accounts;

• Corporation Tax;

• Self Assessment; and

• management accounts.

If CIS, VAT or bookkeeping is taking too much time away from running your construction business, book a consultation with Hamish Accountancy Ltd to discuss the support you need.

Disclaimer: This article provides general information only and should not be treated as personalised tax or accounting advice. CIS treatment depends on the facts and circumstances of each business and transaction. HMRC guidance should be checked where appropriate.