CIS Accounting: A Straightforward Guide for Contractors and Subcontractors

The Construction Industry Scheme (CIS) can feel like a maze of rates, returns, and reverse charges. This blog breaks it down for UK contractors and subcontractors – helping you understand what CIS is, what HMRC expects, and how to keep your business compliant without the headache.

What Is the Construction Industry Scheme (CIS), and Who Does It Apply To?

If you’re working in the construction industry—as a sole trader, limited company, or anything in between, you’ve likely heard of CIS. It’s HMRC’s way of making sure subcontractors in the building trade are paying the right amount of tax.

But the rules can be confusing, especially if you’re acting as both a contractor and subcontractor. That’s where this guide comes in. We’ll explain how CIS deductions work, what your responsibilities are, and how to account for it all in your books.

How CIS Deductions Work

HMRC requires contractors to deduct tax from subcontractors’ pay, before the money even hits their account. The rate depends on the subcontractor’s status:

• 0%: If you’ve got Gross Payment Status (meaning HMRC sees you as squeaky clean), no tax gets deducted.
• 20%: This is the standard rate for subcontractors who are properly registered.
• 30%: This is the penalty rate for those who haven’t registered or can’t be verified.

👉 Want to avoid the 30% hit? Register with HMRC before taking on CIS work.

Your Role as a Contractor

If you hire subcontractors, you’re classed as a contractor under CIS – even if you’re not a huge construction firm. Here’s what you need to do:

1. Verify subcontractors – Use HMRC’s CIS online tool to check their tax status.
2. Apply the correct deduction rate – Based on HMRC’s verification results.
3. Report monthly – File a CIS return to HMRC showing what you’ve deducted.
4. Pay deductions on time – Usually monthly, along with any PAYE or National Insurance.

Missing a return or paying late can trigger penalties, so keeping on top of these dates is key.

If You’re a Subcontractor

Now let’s flip it. If you’re a subcontractor, deductions will be taken from your payments unless you’ve registered and secured Gross Payment Status.

Here’s what you should do:

• Register with HMRC as a subcontractor (to avoid the 30% deduction).
• Track all CIS deductions on your invoices and remittances.
• Claim back overpaid tax via your Self-Assessment (if you’re a sole trader) or offset it (if you’re a limited company).

How to Claim a CIS Refund

• Sole Traders: You’ll claim it on your Self-Assessment tax return.
• Limited Companies: You can offset the CIS suffered against PAYE and National Insurance liabilities—or ask HMRC for a refund if you’ve overpaid.

Accounting for CIS: What Goes Where?

For Sole Traders:

• Show gross income (before CIS) on your tax return.
• Use the CIS deductions as a credit towards your tax bill.
• HMRC refunds any overpaid CIS at the end of the year.

For Limited Companies:

• Record the full income before deductions in your books.
• Track deductions in a CIS Control Account.
• Offset what you’ve paid out in CIS against what you owe in PAYE, NICs, or other taxes.

If your company suffers £500 in CIS but deducts £200 from its own subcontractors, that £200 can be offset against your PAYE bill, reducing what you owe HMRC.

Don’t Forget VAT: The Reverse Charge

The Domestic Reverse Charge (DRC) is another layer for VAT-registered businesses under CIS.

• Subcontractors don’t charge VAT – they add a note saying “Reverse charge applies.”
• The contractor then accounts for both output and input VAT on their return.
• This helps crack down on VAT fraud in the construction supply chain.

Important: If you’re billing an end-user (like a homeowner), the reverse charge doesn’t apply.

Best Practices for Staying on the Right Side of HMRC

• Always verify subcontractors before making payments.
• File your CIS returns on time – every month, no exceptions.
• Keep solid records of deductions, remittances, and HMRC payments.
• Understand offsets so you don’t overpay on PAYE.
• Use proper invoice wording when the reverse charge applies.

CIS can feel like one more admin burden, but managed properly, it becomes part of your monthly routine. The key is to stay organised, meet your deadlines, and keep good records.