CIS Tax UK: Deductions, Returns, and Getting Your Money Back

Who is caught by CIS

Contractors are businesses that pay subcontractors for construction work. That includes the obvious construction businesses, but it also catches deemed contractors — businesses outside construction whose spend on construction operations passes the statutory limit, which can pull property investors, retailers, and manufacturers into the scheme without them expecting it.

Subcontractors are businesses that carry out construction work for a contractor. Sole traders, partnerships, and limited companies are all within scope, and it is common to be both contractor and subcontractor at once — taking work from a main contractor while paying your own subcontractors down the chain. If that is you, you carry both sets of obligations simultaneously.

Construction operations are defined broadly: site preparation, alterations, dismantling, construction, repairs, decorating, and demolition, along with installing systems for heating, lighting, power, water, and ventilation. Some work sits outside the scheme — architecture and surveying, carpet fitting, scaffolding hire without labour, and delivering materials among them. Borderline classification is a routine source of error, and getting it wrong is the contractor's problem, not the subcontractor's.

• Mainstream contractors paying subcontractors for construction work
• Deemed contractors whose construction spend crosses the statutory limit
• Subcontractors trading as sole traders, partnerships, or companies
• Businesses acting as both contractor and subcontractor at once

The three deduction rates, and what they apply to

HMRC tells the contractor which rate to use when the subcontractor is verified. Registered subcontractors attract 20%. Where HMRC cannot verify the subcontractor, the rate is 30%. Subcontractors granted gross payment status are paid in full with no deduction, settling their tax at year-end instead.

Verification must happen before the first payment, not after. A contractor who pays first and verifies later will often have applied the wrong rate, and correcting an under-deduction usually means the contractor makes good the shortfall to HMRC out of its own funds.

The rate applies to the labour element only. Before calculating the deduction you strip out VAT, the cost of materials the subcontractor supplied, and evidenced costs such as plant hire and fuel where the rules allow. Overstated materials are one of the most common CIS errors HMRC finds on review, so materials need to be genuinely evidenced on the invoice rather than estimated.

• 0% — gross payment status
• 20% — registered and verified subcontractors
• 30% — subcontractors HMRC cannot verify
• Deduct from labour only: exclude VAT, materials, and evidenced plant costs

Contractor obligations: CIS300 returns, statements, and payment

A CIS tax month runs from the 6th of one month to the 5th of the next. The monthly CIS300 return covering that period must reach HMRC by the 19th, listing every subcontractor paid, the gross payment, the materials element, and the deduction made.

From 6 April 2026, the obligation to file a nil return was reinstated for mainstream contractors. If you paid no subcontractors in a month you must either file a nil return or notify HMRC of a period of inactivity — doing neither now attracts a penalty for a month in which no money moved at all.

Two more deadlines sit alongside the return. Deductions must be paid to HMRC by the 22nd of the month where you pay electronically, or the 19th by post. And every subcontractor you deducted from must receive a payment and deduction statement within 14 days of the end of the tax month, because that statement is their evidence when they reclaim.

• CIS300 return by the 19th of the month following the tax month
• Nil return or inactivity notification required where no subcontractors were paid
• Deductions paid to HMRC by the 22nd (electronic) or 19th (post)
• Payment and deduction statements to subcontractors within 14 days

What late CIS300 returns cost

CIS penalties escalate on a fixed schedule and they apply per return, so a contractor who falls behind across several months accumulates them in parallel rather than once. A fixed penalty of £100 is charged the day after the filing date. A second fixed penalty of £200 follows two months after the filing date.

At six months a tax-geared penalty applies — the greater of £300 or 5% of the deductions shown on the return. The same measure applies again at twelve months, and where HMRC believes information has been deliberately withheld that later penalty can be significantly higher.

Because the fixed penalties bite regardless of whether any tax was due, nil returns are disproportionately expensive to forget. A contractor with a quiet six months who files nothing can build a penalty position out of an entirely dormant scheme.

• £100 — the day after the filing date
• £200 — two months after the filing date
• Greater of £300 or 5% of deductions — at six months
• Greater of £300 or 5% of deductions, potentially higher — at twelve months

Subcontractors: gross payment status and getting deductions back

For subcontractors, CIS is primarily a cash flow problem. Tax is withheld from every invoice throughout the year, but allowable expenses — tools, materials, travel, insurance, protective equipment — are only relieved when the return is filed. The result is that a large share of CIS subcontractors are due a refund rather than a further payment.

How you reclaim depends on your structure. Sole traders and partners set CIS deductions against the income tax and Class 4 National Insurance calculated on their Self Assessment return, with any excess repaid. Limited company subcontractors do not use Self Assessment for this: the company offsets CIS deductions suffered against its own PAYE, National Insurance, and CIS liabilities by reporting them on the Employer Payment Summary, and claims a repayment of any balance after the tax year ends.

Gross payment status removes the deduction entirely and is worth pursuing if your turnover supports it. HMRC applies three tests — a business test, a turnover test, and a compliance test — and reviews the position periodically, so late returns or late payments can cost you the status once you have it.

One related point regularly missed: the VAT domestic reverse charge for building and construction services has applied since March 2021. Where it applies, the customer accounts for the VAT rather than the supplier charging it, which changes both your invoices and your VAT return figures. CIS status is part of how you determine whether the reverse charge applies to a supply.

• Sole traders and partners reclaim through Self Assessment
• Limited companies offset via the Employer Payment Summary
• Gross payment status requires business, turnover, and compliance tests
• VAT domestic reverse charge interacts with CIS on construction supplies

How FinnAccountings supports CIS bookkeeping

FinnAccountings keeps the underlying records that CIS compliance depends on: payments to and from subcontractors, the materials split on each invoice, receipts captured against the labour and materials elements, and deduction statements filed where you can find them at year-end rather than at the bottom of a van.

For contractors, that means the figures behind each monthly CIS300 are assembled as payments happen, with missing verification details and unevidenced materials flagged before the 19th rather than after a penalty notice. For subcontractors, deductions suffered are tracked cumulatively so you can see the refund position building through the year instead of guessing at it.

We prepare draft figures and export-ready packs, with Chartered Accountant insight on the AI's output. You or your qualified adviser — an ICAEW or ACCA member in the UK — review and submit to HMRC. FinnAccountings does not file CIS returns on your behalf, and AI carries no legal accountability for what is submitted in your name.

• Subcontractor payments with labour and materials separated
• Deduction statements captured and matched to payments
• Running total of deductions suffered against the expected refund
• Chartered Accountant insight before you or your adviser file with HMRC