CIS Deductions: How Much Tax Is Taken and Why

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The UK construction industry is unique in terms of taxation, as a result of HM Revenue and Customs’ Construction Industry Scheme for handling payments between contractors and subcontractors.

Managing tax obligations efficiently is essential to avoid issues with HMRC for construction workers. Understanding how CIS deductions work can help you to comply with the law, avoid penalties and potentially reclaim overpaid tax.

What is CIS?

The Construction Industry Scheme requires contractors to deduct tax from subcontractors' payments and send it directly to HMRC, rather than relying on the traditional self-assessment process. The scheme applies to a wide range of related industries such as building, renovations, demolition and installations.

One of the main reasons CIS exists is due to the structure of the construction industry. Launched in 1971, the law tackled the challenges of having large numbers of workers moving from site to site and working for multiple different contractors. At the time, it was reported that CIS was being introduced to improve the efficiency of tax collection, as it is collected at source, in a similar way to how PAYE works. This approach ensures subcontractors can reduce the risks of underpaying or potentially avoiding tax inadvertently and this helps HMRC track earnings more accurately in an industry where short-term contracts and cash payments are common.

CIS registration

As a contractor, you must register for the CIS scheme by law before taking on a subcontractor. Set yourself up as a new employer via HMRC to receive an employer PAYE reference number. Determine whether you should employ or subcontract a worker, as you could be penalised if you make a mistake in the procedures.

Verify whether your subcontractor is registered for CIS through HMRC’s online services, or by using specific accounting software. Alternatively, people in the construction industry often use the services of an accountant to navigate the potentially complex administration tasks.

When choosing a professional accountant in Cornwall, DL Accounts, based in St Austell, are leading experts in digital accounting solutions; we can help guide you through the legalities of CIS and manage the practical steps to ensure your business is compliant.

After registering for CIS and verifying your subcontractors, you’ll be responsible for deducting money from their pay for income tax and National Insurance. You must file monthly returns and retain the records, as failing to do so can lead to penalties. New subcontractors can also register for CIS online through the Government Gateway site, for which you’ll need a password and Unique Tax Reference number. You can also register for self-assessment.

Different CIS tax rates

When you register as a subcontractor, you can save 10% on your tax bills. Subcontractors who choose not to sign up for CIS pay tax at 30%, compared with 20% for those who do register.

There are two main deduction rates under the scheme: 20% and 30%. While registered subcontractors can pay the lower rate of 20%, they may be moved to the higher rate of 30% if HMRC suspects any compliance issues including missed tax returns or unpaid liabilities, so it’s in everyone’s best interests to make sure everything is calculated correctly. In some cases, eligible subcontractors can apply for Gross Payment Status, enabling them to pay tax and National Insurance in full, rather than CIS deductions.

Keeping your tax affairs in good order is vital, such as submitting your tax returns on time, paying outstanding liabilities promptly and responding to any HMRC correspondence as soon as possible. Failure to meet these obligations can result in HMRC increasing your deduction rate, or removing benefits such as Gross Payment Status.

What are the Gross Payment Status criteria?

You must run your business through a registered business bank account, maintain a good compliance history with HMRC and meet specific turnover thresholds. For example, the annual turnover threshold typically needs to exceed £30,000 per individual, or £100,000 for a company.

Achieving GPS can significantly improve your cashflow, but the qualification process is strict. Many subcontractors find it helpful to work with a small business accountant to prepare and submit their GPS application.

Handling CIS deductions

Contractors are responsible for verifying each subcontractor’s status with HMRC, applying the correct deduction rate, and submitting monthly returns detailing payments and deductions. Once the deductions are made, contractors must send the appropriate tax to HMRC, usually by the 19th of each month. Failure to follow the procedures accurately and on time can result in penalties and increased scrutiny from the ‘tax man’.

As a contractor, maintaining accurate records and staying up to date with reporting obligations is crucial. Many contractors also choose to use professional accounting services to ensure the returns are handled correctly.

Reclaiming overpaid tax

It’s surprisingly common for subcontractors to overpay tax under CIS, especially if they have allowable business expenses, or periods of lower income. However, overpaid tax can be reclaimed by filling in a self-assessment tax return at the end of the financial year.

You must keep detailed records of all your income, deductions and expenses including statements from contractors, receipts for business costs, mileage logs and any other relevant documents. It’s usual for an accountant to prepare the accounts, identify eligible expenses and calculate the CIS rebate accurately to avoid mistakes.

Claiming expenses as a subcontractor

Subcontractors can reduce their tax liability by claiming legitimate business expenses such as tools and equipment, protective clothing, vehicle costs for business travel, phone bills, insurance and even accountancy fees. The key is to maintain good bookkeeping throughout the year. You’ll need to keep all receipts and ensure your records match up with your income and invoices. Proper documentation is essential to support your claims if HMRC ever conducts a review.

How a small business accountant can help

Working with a qualified accountant, who understands the construction industry, can make a substantial difference. A CIS accountant can help you register with HMRC, manage monthly deductions, file your self-assessment return and apply for Gross Payment Status if eligible.

Tailored services for construction workers include bookkeeping support, VAT checks, payroll and full tax compliance to take the hassle out of managing CIS. The consequences of non-compliance can be serious, leading to financial and other penalties; it can also damage your reputation. Understand your obligations and, where necessary, seek professional help.