CIS

CIS catches people out in both directions

The Construction Industry Scheme is HMRC's arrangement for the building trades: a contractor deducts tax at source from what it pays a subcontractor and hands it to HMRC on that subcontractor's behalf. Most CIS guidance is written for one side of that transaction. In practice we see the same business on both: a contractor who is paying subcontractors and is also, further up the chain, a subcontractor being paid under deduction.

The two roles have almost nothing in common administratively. As a contractor your exposure is verification, deduction and monthly returns, and the risk is penalties and being liable for tax you did not deduct. As a subcontractor your exposure is money: tax has already been taken off you, and if it is never properly reclaimed it simply stays with HMRC.

Deductions suffered and never reclaimed

This is the one that costs subcontractors real money, and it is quiet, because nothing goes wrong. Nobody writes to you. There is no penalty. The tax has been deducted at source and it sits on your record, and if it is not claimed against your liability then you have simply paid more tax than you owed.

It happens when the deduction statements are not kept, so there is no reliable record of what was suffered. It happens when the bookkeeping records the net payment received rather than the gross with the deduction shown separately, so the CIS suffered never appears anywhere to be reclaimed. And it happens when the CIS control account has never been agreed to what the deduction statements actually say.

So keep the statements, and record the gross. Those two habits are most of the work, and they are the ones we set up first.

If you are the contractor

Verify subcontractors with HMRC before you pay them, apply the deduction rate that verification gives you, file the monthly return, and keep records that support all three. Where you have paid no subcontractors in a month, HMRC's position is that you either file a nil return or make an inactivity request where that is appropriate. Doing neither is what attracts the penalty.

The part that costs contractors most is not the returns, it is status. Whether somebody is genuinely self-employed or is in reality an employee is a question of fact about how they actually work, not something either side gets to decide by agreement or by issuing an invoice. If HMRC concludes the working arrangement was employment, the liability for the tax and National Insurance that should have been operated sits with the contractor.

We can give you the information HMRC uses to assess status, help you work through the CIS and HMRC process, and help you document how you reached your decision, which is what makes it defensible. Specialist employment-status advice is not something this practice provides: where a case genuinely needs it we will say so and point you to it. What nobody can honestly offer you is certainty, because it turns on the facts of each engagement and those change.

If you are the subcontractor

We claim credit or a refund for the CIS deductions you have suffered, where one is due and including where too much has been deducted, calculate what tax is actually due once those are set against it, and tell you how and when to pay anything remaining.

Where you are starting out, that also means registering as self-employed with HMRC and getting your Unique Taxpayer Reference in place, which is worth doing early: your UTR is what verification depends on, and an unverified subcontractor is deducted at the higher rate rather than the standard one. That difference is yours to reclaim eventually, but in the meantime it is your cash sitting with HMRC.

How the deductions come back depends on how you trade, and the two routes have nothing in common. If you are a sole trader or a partner, the deductions suffered are reported on your Self Assessment return and taken into account against the tax due, which is why those two services usually go together.

If you trade through a limited company it does not touch the company's tax return at all. The deductions suffered are reported through the company's own payroll scheme on an Employer Payment Summary, and set against what the company owes HMRC. Where there is more deducted than owed, the unused amount is carried forward within the same tax year, and anything still left after the year end is claimed back from HMRC under the limited company CIS refund process.

That difference matters because it decides where the money actually surfaces. A company that reports its CIS suffered only at the year end, rather than on the EPS as it goes, is leaving cash with HMRC for months that it could have been setting against its own PAYE bill.

Agreeing the CIS control account

Whichever side you are on, there is a balance in your books representing CIS, and it should agree to something real: the deduction statements you issued or the ones you received, and what has actually moved between you and HMRC.

We reconcile it as part of the ordinary bookkeeping rather than at the year end. Left to the year end, a CIS control account that does not agree is a forensic exercise across twelve months of statements, and the statements are exactly the documents that are hardest to get hold of after the fact.

Where CIS and payroll run side by side

Plenty of construction businesses have employees on the payroll and subcontractors under CIS at the same time. These are two separate regimes with separate returns, separate deductions and separate liabilities, and the amounts are not interchangeable even though they are both paid over to HMRC.

Running them together, so the PAYE and the CIS both reconcile to HMRC's account rather than only to your software, is the difference between a construction business that knows where it stands and one that finds out when a letter arrives.