, Building
Your first CIS statement arrives and £1,100 of what you invoiced has gone somewhere before it reached you. The contractor is not withholding it, exactly. They have paid it to HMRC on your account, and you will see it again, months from now, if your paperwork is right.
The Construction Industry Scheme is a tax collection mechanism dressed up as an industry rulebook. It does not decide whether you are employed or self-employed, it does not change what you owe, and it is not optional for anyone it applies to.
Who is in the scheme, and at what rate
CIS applies when a contractor pays a subcontractor for construction operations in the UK. Contractor here means two groups. Mainstream contractors, whose business is construction. And deemed contractors, meaning businesses outside construction that spend heavily on it, which since April 2021 means expenditure of more than £3m on construction operations within the previous 12 months, replacing the older averaging test.
Construction operations are defined broadly: site preparation, alterations, demolition, dismantling, building, civil engineering, installation of heating, lighting, power, water and ventilation, internal cleaning after construction, painting and decorating. There are exclusions, including professional work by architects and surveyors, carpet fitting, delivery of materials, and the manufacture of materials off site.
If the work is within the scheme, both sides have duties. The contractor must register as a contractor, verify subcontractors, deduct where required, file monthly and issue statements. The subcontractor should register, though they can be paid without registering at a worse rate.
Before paying a new subcontractor, the contractor verifies them with HMRC, online, giving the subcontractor's name, unique taxpayer reference and national insurance number or company registration number. HMRC returns a verification number and a rate.
Three outcomes exist.
- 30% deduction, where the subcontractor is not registered or cannot be matched to HMRC's records.
- 20% deduction, the standard rate for a registered subcontractor.
- 0%, gross payment, for subcontractors holding gross payment status.
The difference between 30% and 20% is entirely administrative and entirely avoidable. Registering costs nothing.
Labour, materials and the bits in between
The deduction applies only to the labour element of the payment. This is the part that goes wrong most often, in both directions.
Excluded from the deduction: VAT charged, the actual cost of materials the subcontractor bought and used on the job, consumable stores, plant hired from a third party with associated fuel, and the CITB levy where it applies. Included: everything else, which in practice means labour, profit, the subcontractor's own plant, and any mark-up on materials.
So the invoice has to separate materials from labour, and the materials figure has to be the direct cost. A contractor who accepts an inflated materials figure to reduce the deduction is the one on the hook if HMRC disagrees, because the obligation to deduct correctly sits with the payer.
The other rule that catches people is the VAT domestic reverse charge for building and construction services, in force since 1 March 2021. Where a supply is within CIS, both parties are VAT registered, and the customer is not an end user, the customer accounts for the VAT rather than the supplier charging it. It is a separate regime that borrows the CIS boundary, and getting it wrong distorts your VAT return rather than your CIS position.
Monthly returns and the deadlines
Contractors file a monthly return, the CIS300, covering each tax month ending on the 5th, due by the 19th. A nil return is required if you have paid no subcontractors, unless you have told HMRC the scheme is inactive.
The penalties are fixed and they escalate. £100 for one day late, a further £200 at two months, and at six months and again at twelve months a further £300 or 5% of the deductions on the return, whichever is higher. Those add up quickly on a scheme that has been overlooked for a year.
Contractors must also give each subcontractor a payment and deduction statement within 14 days of the end of the tax month. Subcontractors should keep every one of them, because they are the evidence for the reclaim.
Gross payment status is a compliance test
Gross payment status means being paid in full, with no deduction, and settling your tax in the ordinary way. For a subcontractor with a real payroll, it is the difference between a functioning cash flow and a permanently strained one.
There are three tests. The business test, meaning you carry on a construction business in the UK with a bank account. The turnover test, broadly £30,000 of construction turnover excluding materials for a sole trader, £30,000 per partner or director, or £100,000 for a company overall. And the compliance test, meaning you have met your tax obligations on time in the previous 12 months, which since 6 April 2024 expressly includes VAT obligations.
HMRC reviews the status and can withdraw it, and since April 2024 has power to remove it immediately in cases involving certain tax fraud. Losing it is unpleasant, because the loss lands on your cash flow at the moment when you least want a 20% reduction in receipts.
The reclaim that props up the year
For the subcontractor, the deductions are payments on account of tax, not a tax in themselves.
A sole trader or partnership claims them through Self Assessment. Because 20% of gross labour is very often more than the eventual income tax and Class 4 National Insurance due after expenses and the personal allowance, this commonly produces a repayment, which is why a great many small trades treat the tax return as a payday rather than a bill.
A limited company subcontractor is different, and this is where money gets stuck. The company offsets CIS deductions suffered against its own PAYE and National Insurance liabilities, by reporting them on the monthly Employer Payment Summary. Any excess is carried forward through the tax year and repaid after the year end. A company with few employees and large CIS deductions accumulates a balance it cannot use until April, which is a real and predictable cash flow event to plan for rather than discover.
Where this shows up in the game
Business Baron deducts CIS at the right rate for the year and holds the money where you cannot spend it, so the money you invoice and the money that arrives are not the same figure. The building trades are part of the full game, and construction firms arrive with the Property & Construction Track, an add-on to it. Money held back is working capital you do not have, whatever the invoice said.