CIS bookkeeping for subcontractors and contractors: deductions, returns and refunds

The Construction Industry Scheme, known as CIS, makes the bookkeeping of a building business different from almost any other. Money is deducted before you receive it, statements arrive monthly, labour and materials have to be separated, and VAT behaves differently from ordinary sales. If you get the records wrong you lose cash flow, miss refunds or file incorrect returns. This guide explains how CIS works from both sides, and what to record.

What CIS is

CIS is a scheme under which contractors in the construction industry deduct money from payments to subcontractors and pass it to HMRC. The deductions count as advance payments towards the subcontractor's tax and National Insurance. It covers most construction work, including building, alterations, repairs, demolition, decorating and installing systems such as heating and lighting, whether in houses, offices or infrastructure.

Anyone who pays subcontractors for construction work is a contractor, which includes many businesses outside the construction sector that spend more than £3 million a year on construction. Anyone who is paid for construction work by a contractor is a subcontractor.

The three deduction rates

Subcontractor status	Deduction from labour
Registered with HMRC for CIS	20%
Not registered	30%
Gross payment status	0%

The deduction applies to the labour part of the payment only, not to materials, equipment or VAT. Subcontractors who register get the lower rate. Those who qualify for gross payment status are paid in full and settle all their tax through their own return.

Gross payment status

To qualify for gross payment status a subcontractor must pass three tests: the business test, the turnover test and the compliance test. The turnover test requires construction turnover, excluding VAT and materials, of at least £30,000 a year for an individual, with different rules for partnerships and companies. The compliance test requires returns and payments to be up to date. HMRC reviews status regularly and can withdraw it, which immediately changes the cash flow of the business, so keep your compliance in order.

What contractors must record and report

If you are a contractor, you must:

1. Register as a contractor with HMRC.
2. Verify every subcontractor before the first payment, to find out the correct deduction rate.
3. Make deductions from labour payments at the verified rate.
4. File a monthly return by the 19th of the month after the tax month ends, which runs from the 6th to the 5th. For example, the return for 6 October to 5 November is due by 19 November.
5. Pay the deductions to HMRC, normally by the 22nd for electronic payment, alongside any PAYE.
6. Give each subcontractor a payment and deduction statement within 14 days of the end of the tax month.
7. Keep records of payments, deductions and verification for at least three years.

Late returns attract automatic penalties, starting at £100 and increasing with delay, so file even when there is nothing to report, or send a nil return.

What subcontractors must record

If you are a subcontractor, you need to:

• Record every invoice, separating labour, materials and VAT
• Record the CIS deduction against each payment
• Keep every monthly statement from each contractor
• Reconcile deductions on statements to your bank receipts
• Keep a record of materials purchased for jobs

The reconciliation matters. Your bank receipt will be less than the invoice by the deduction. If your books show only the net receipt, your income is understated. Record the full invoice as income and the deduction as tax already paid.

A worked example

You invoice a contractor for £5,000: £3,000 of labour and £2,000 of materials. You are registered for CIS at 20%. The contractor deducts £600, which is 20% of £3,000, and pays you £4,400. In your books you record £5,000 of income, £600 of CIS deduction suffered and £4,400 of cash received. If you are VAT registered the VAT treatment depends on whether the reverse charge applies, covered below.

Getting your deductions back

Deductions are credited against your tax bill. If your tax is less than the deductions, HMRC refunds the difference.

Sole traders claim through Self Assessment: enter the deductions on the return and the total reduces the tax you owe, with any excess refunded.

Limited companies offset deductions against their PAYE and National Insurance liability, using the monthly Employer Payment Summary. Any excess after the end of the tax year can be reclaimed. Companies with significant CIS deductions often find the cash comes back faster than for sole traders.

Either way, the refund depends on accurate records of each deduction, so a missing monthly statement can delay money you are owed.

The VAT domestic reverse charge

For most construction services supplied between VAT-registered businesses, the customer accounts for the VAT instead of the supplier. The supplier's invoice shows the VAT that would have been charged, with a note that the reverse charge applies, but the supplier does not charge it. The customer accounts for the VAT on their VAT return as both output and input, so it cancels out for most customers. The reverse charge does not apply to end users or intermediaries that are not themselves VAT-registered contractors, and it does not apply to supplies with a zero rate. Getting this wrong is a common error with real cash consequences. Our VAT guide covers the basics, and our CIS bookkeeping service handles the coding.

Retentions and stage payments

Many construction contracts hold back a percentage of each payment until the work is signed off. These retentions are income you have earned but not received. Track them separately so you know how much is owed and when, and chase them promptly when due. If the CIS deduction applies to a payment, it applies when the payment is made, so deductions on retention releases appear later.

Materials and job costing

Profit is made or lost job by job. Coding materials, labour, plant hire and subcontractor costs to each job lets you compare estimate and actual. Without it, you see only overall profit and cannot learn from jobs that lost money. See our guide to bookkeeping for construction and trades and bookkeeping for property developers.

Common mistakes

• Treating the bank receipt as the invoice amount
• Not recording CIS statements and missing refunds
• Deducting CIS from materials
• Failing to verify a subcontractor before paying
• Missing the monthly return, including nil returns
• Charging VAT when the reverse charge applies
• Losing gross payment status through late filing

A monthly CIS routine

1. Reconcile bank receipts to invoices and record deductions.
2. File the contractor return by the 19th, if applicable.
3. Pay the deductions to HMRC by the 22nd.
4. Issue subcontractor statements.
5. File and file away contractor statements received.
6. Review retentions and aged debtors.
7. Check the reverse charge on invoices.

Use our monthly checklist as the base and add these.

Frequently asked questions

What is the CIS deduction rate?

20% for registered subcontractors, 30% for unregistered, and 0% for those with gross payment status.

When is the CIS monthly return due?

By the 19th of the month after the tax month ends, which runs from the 6th to the 5th.

Can limited companies claim CIS refunds?

Yes, by offsetting deductions against PAYE and National Insurance, with any excess reclaimed after the tax year.

Does CIS apply to materials?

The deduction applies to labour only, not materials, equipment or VAT.

Can you handle my CIS bookkeeping?

Yes. See CIS bookkeeping or get an instant quote.