What is CIS?

How does CIS work in practice?

If you pay other people to do construction work, you are a contractor and must register, verify each subcontractor with HMRC, deduct tax from the labour part of their invoices, file a monthly CIS return and pay the deductions over. If you are the one being paid, you are a subcontractor and the deduction comes off before the money reaches you.

The deduction applies to labour, not materials, and the rate depends on the subcontractor's status with HMRC: 20% for registered subcontractors, 30% for unregistered ones, and nothing at all for those with gross payment status.

The deductions are not a separate tax. They are payments on account of the subcontractor's income tax or corporation tax, so a sole trader subcontractor reclaims or offsets them through Self Assessment, and a limited company offsets them against its PAYE liabilities during the year.

A worked example

A bricklayer registered under CIS invoices a building contractor for £2,400 of labour and £600 of materials, a total of £3,000. The contractor verifies him with HMRC, finds he is registered, and deducts 20% of the labour only: £480.

The contractor pays the bricklayer £2,520, gives him a payment and deduction statement, reports the £480 on the monthly CIS return and pays it to HMRC by the 22nd of the following month.

At year end the bricklayer's Self Assessment shows £480 already paid against the tax he owes. If his total deductions for the year exceed his tax bill, HMRC refunds the difference.

What do people get wrong?

• —Deducting from materials as well as labour. Only labour is deductible, so the invoice needs to split the two.
• —Not verifying a subcontractor before paying them, which risks the wrong rate being applied.
• —Losing the deduction statements. Without them, the subcontractor cannot prove what was taken off.
• —Missing the monthly return, which is due even when no subcontractors were paid that month.