CIS deductions, and how you get the money back

What the deduction actually is

The contractor is collecting your tax for you. They take the percentage off, pay it to HMRC against your name and Unique Taxpayer Reference, and it sits there as tax you have already paid. At the end of the year it comes off your bill. Nothing has been taken from you permanently, which is worth being clear about before anyone starts arguing about it on site.

There are three rates and no others. 20% if you are registered with HMRC and the contractor verifies you. 30% if you are not registered, or if verification fails because a detail does not match. 0% if you hold gross payment status, where the contractor pays your invoice in full and you settle the whole bill yourself later.

It only applies to construction work done for a contractor. Work you do directly for a homeowner sits outside the scheme: a private customer is not a contractor, deducts nothing, and pays the invoice as written. The same trade can spend Monday on a subcontract with a fifth of its labour held back and Tuesday on a kitchen being paid in full, and both are normal.

The gap between the two live rates is the cheapest money in this subject. Ten points of your labour, on every invoice, for a registration that takes one call. If you are reading this because 30% has appeared on a statement, that is what it means, and it is fixable.

Almost every business this applies to is one person and a van. Our analysis of the government's own figures found around 500,000 construction businesses, about 57% of the sector, missing from the official business register altogether. Read the register gap study

What it comes off, and what has to come off first

The deduction is on labour. Before applying the percentage, the contractor has to strip out everything on the invoice that is not your labour, and HMRC sets out what that is: VAT, materials you paid for, consumable stores that have been used up, fuel used other than for travelling, plant hired in for that job, and the cost of manufacturing or prefabricating materials.

This is where money is quietly lost, and it is lost on the invoice rather than in the tax. An invoice reading "supply and fit, £3,300" gives a contractor nothing to strip out, so the deduction lands on all of it. The same job invoiced as £2,400 of labour and £900 of materials has 20% applied to £2,400. That is £480 held back instead of £660, a difference of £180 on one job, on money that was never taxable income in the first place because you had already handed it to the merchant.

So split labour and materials on the face of every invoice, on every job, whether or not this one feels like it matters. You also have to be able to stand behind the materials figure, which means keeping the receipts with the job rather than in the footwell. A contractor being careful will ask for them. One being careless will deduct on the total and leave you to unpick it a year later.

Travel fuel is the exception people trip over. Fuel burned by a machine on site comes out before the deduction. Diesel to get the van there does not, because that is a business expense of yours, claimed in your accounts like any other, rather than a cost sitting on this invoice.

The statement you are owed every month

Every time a contractor makes a deduction they have to give you a payment and deduction statement, within 14 days of the end of the tax month. Tax months run from the 6th of one month to the 5th of the next, so payments made between 6 May and 5 June produce a statement due by 19 June.

That statement is your evidence, and it is the only copy you get. HMRC does not send subcontractors a year-end summary of what was taken off them. If a contractor stops answering, goes under, or simply never posts anything, the deductions still happened and you still have to prove them, and "he definitely took 20%" is not proof.

So reconcile monthly rather than in January. One line per payment: invoice number, gross, materials taken off, deduction, date the money landed. Five minutes a month against a year of archaeology. If statements are not arriving, ask in writing while the job is live and you still have some leverage, not after the final payment when you have none.

Contractors file their own monthly return to HMRC by the 19th, with a £100 penalty the day it is late, so your paperwork is already on their desk when yours falls due. A contractor who cannot produce statements is usually behind on the returns as well, which tells you something useful about how the rest of the payment run is being handled.

Registered, unregistered, and gross payment status

Registering as a subcontractor is a separate thing from registering as self-employed, and doing the second does not do the first. Until it is done, and until the contractor has verified you, they are obliged to take 30%. That is not them being awkward. Verification is a check run against HMRC, and it fails on mismatched details as easily as on missing registration, so a name that reads differently on your invoice and your tax record is enough to cost you ten points.

Gross payment status removes the deduction altogether. The tests are turnover excluding materials of at least £30,000 a year, a clean compliance record with HMRC, and a business bank account. HMRC then reviews you periodically and can withdraw it, which is the real price of it: your filing and payment record has to stay tidy.

Be honest about what it changes. Gross status is a cashflow change, not a tax saving. You keep the money through the year and pay the whole bill in one go afterwards, which is better only if the money is still there when the bill arrives. Plenty of subcontractors who won gross status discovered that the deduction had been doing something useful, and that it is easier to pay tax you never had than tax you have already spent.

How you get it back

Through Self Assessment, once a year. You declare turnover and expenses as normal, then enter the CIS deductions as tax already paid. They come off your income tax and Class 4 NI first, and if they add up to more than the bill, HMRC refunds the difference.

Refunds are common in this trade, and the reason is structural rather than lucky. The deduction is a flat percentage of labour turnover. Your actual tax is worked out on profit, after expenses, after the personal allowance, so a subcontractor with real costs and an ordinary year has usually had more taken than they owed.

Two things follow. A refund is not a windfall, it is your own over-withheld money coming back, so it should not be spent twice before it lands. And the fact that tax is being prepaid every month changes how much you need to put aside out of everything else you do, which is the arithmetic in the set-aside guide in this series.

The one thing that stops a refund cold is missing statements, which is the whole reason the monthly habit above earns its five minutes. You cannot claim back a deduction you cannot evidence.

What it does to your cashflow all year

A subcontractor on 20% is lending HMRC a fifth of their labour every month and getting it back once. On £3,000 of labour a month that is £600 gone monthly and £7,200 sitting with HMRC by the end of the year, on top of whatever retention somebody else is holding and whichever invoices have gone quiet.

That is worth knowing when you price. It does not change what the job is worth, but it changes what arrives in the account this month, and a lot of subcontract work that looks healthy on paper is thin in the bank for exactly this reason.

The levers that help are dull ones. Invoice with materials split out so the deduction only ever lands on labour. Get the statements so the refund is not delayed by a paper chase. Keep deposits and stage payments working on the rest of your jobs, because CIS money is not there to do that job for you.