CIS deductions: rate, base and timing

The Construction Industry Scheme makes the contractor deduct money from a subcontractor's payment and pass it to HMRC as an advance towards that subcontractor's tax and National Insurance. It is a withholding, not a charge. The subcontractor gets the credit for it. But the contractor has to get the rate, the base and the timing right.

The three rates

• 20% for a subcontractor who is registered under CIS and has been verified
• 30% for a subcontractor who is not registered, or who cannot be verified
• 0% for a subcontractor who holds gross payment status

The rate is not a matter of judgement. It follows from the subcontractor's status with HMRC, and the contractor establishes that status by verifying the subcontractor before paying it.

What the deduction comes off

The deduction applies to the labour element of the payment, not the whole invoice. Several things are taken out of the base before the percentage is applied:

• Materials
• VAT
• Plant, where the conditions for excluding it are met
• The CITB levy, where it applies

So the sequence is: strip out materials, VAT, qualifying plant and the CITB element, and apply the rate to what is left. Apply the rate to the gross invoice instead and the subcontractor is over-deducted, which it will notice and query, and which the contractor then has to unwind.

Where CIS sits on the payment ladder

On a subcontract, the payment already runs down a ladder. There is the gross value of the work, then retention comes off, and the net after retention is what would otherwise be paid. CIS is a further deduction on that same ladder, and it belongs on its own line rather than folded into any other figure.

Keeping it separate matters because retention and CIS answer different questions. Retention is money held back that will be released later to the subcontractor. CIS is money withheld now and passed to HMRC as the subcontractor's tax on account. Netting them together hides both.

Timing: the monthly return

The contractor reports its CIS deductions to HMRC on a monthly return, due by the 19th of the month. The deductions taken from subcontractor payments in a tax month are declared and paid over on that cycle. A contractor that deducts correctly but reports late still has a problem, because the obligation is both to deduct and to file on time.

What CIS covers and what it does not

CIS applies to construction operations. Not everything on a construction project is a construction operation. Professional services are outside it, and some manufacturing is outside it too. The scheme draws a line, and work on the far side of that line is paid without a CIS deduction.

The practical consequence is that a single supplier can be doing some work inside CIS and some outside it, and the deduction only bites on the part inside. That is another reason to keep the CIS line explicit rather than applying a blanket percentage to everything a subcontractor invoices.

The check before the payment goes out

• Has the subcontractor been verified, and is the rate the one HMRC returned?
• Have materials, VAT, qualifying plant and any CITB element been taken out of the base?
• Is the CIS deduction shown on its own line, separate from retention?
• Will the deduction land on the monthly return due by the 19th?

If the rate matches the verified status, the base excludes what it should, and the line is shown separately, the deduction is right and the subcontractor can see exactly what was withheld and why.