CIS deductions explained: 20%, 30% and gross payment status

What gets deducted, from what

Under the Construction Industry Scheme, a contractor paying a subcontractor for construction work must deduct tax from the payment and send it to HMRC on the subcontractor's behalf. Crucially, the deduction is worked out on the labour part only: the cost of materials the subcontractor actually paid for comes off first, and VAT is never included in the calculation. That's why a clear labour/materials split on the invoice isn't bookkeeping fussiness — it directly changes the money that arrives.

Why some people lose 30%

Before paying a subcontractor for the first time, the contractor must verify them with HMRC. HMRC checks the subcontractor's details (name, UTR, National Insurance or company number) and tells the contractor which rate to use. If the details don't match or the subcontractor has never registered for CIS, HMRC issues a verification number and instructs the contractor to deduct 30%.

The fix is usually simple: register for CIS (it's free, via HMRC) and make sure the details you give contractors exactly match what HMRC holds — a UTR under a slightly different trading name is a classic cause of an unnecessary 30% rate. The 10% gap isn't lost forever — it's reclaimable at year end — but it's your cash flow lending HMRC money in the meantime.

Gross payment status: the 0% rate

Subcontractors with gross payment status are paid in full, with no deduction — they settle all their tax through their own return instead. To qualify you must generally pass three tests:

• Business test — you run a construction business in the UK, with a bank account
• Turnover test — broadly, construction turnover (excluding materials) of at least £30,000 for a sole trader, £30,000 per partner or director, or £100,000+ for the whole partnership or company
• Compliance test — your tax returns and payments have been on time

The trade-offs: gross status is brilliant for cash flow, but it means nothing has been paid on account — the full tax bill lands with you at year end, so discipline about setting money aside matters. HMRC also reviews gross status holders' compliance regularly, and late returns can cost you the status.

Getting the deducted tax back

Deductions aren't extra tax — they're payments on account of your tax bill, evidenced by the statements your contractors must give you (see our guide to CIS statements):

• Sole traders and partners claim the deductions on their Self Assessment return — set against tax and Class 4 NI due, with anything left over refunded. Many subbies are due a refund most years.
• Limited company subcontractors offset deductions against their PAYE/NI liabilities during the year through the EPS, and reclaim any surplus from HMRC after the tax year ends.

If you're the contractor

The rate isn't your choice — it's HMRC's answer at verification, and using the wrong one is your liability, not the subbie's. Verify before first payment, keep the verification records, deduct on labour only, and give every subcontractor their statement each tax month. Get the labour/materials split from their invoice right, and the rest of the chain — statements, CIS300, year-end — falls into place.

This guide is general guidance, not tax advice. Thresholds and rules change — check current HMRC guidance or speak to your accountant about your own position.