Construction and CIS Accounting: What Contractors and Subcontractors Need to Know

Contractors may need to verify subcontractors, deduct tax, give deduction statements, and file monthly CIS returns. Subcontractors need to understand deductions suffered and how those deductions are reclaimed or offset.

CIS is easier when subcontractor details, payment dates, materials, labour, and deduction statements are captured as work happens. Leaving it until year end can create PAYE, tax return, and cash flow problems.

Many construction businesses also need advice on the domestic reverse charge, VAT registration, flat rate scheme suitability, and whether supplies are to end users or other VAT-registered contractors.

CIS covers specified construction operations and can apply beyond businesses that describe themselves as builders. It can also affect organisations that spend enough on construction to be treated as deemed contractors. Check both the work and the payer’s status before the first subcontractor payment.

CIS does not turn an employee into a subcontractor. Decide employment status first using the contract and actual working practices. If the person works through an intermediary, off-payroll rules may also need consideration before CIS treatment.

Collect the legal name, trading name, address, Unique Taxpayer Reference and National Insurance or company number as applicable. Verify the subcontractor with HMRC unless a valid recent verification can be reused under the rules. Save the verification number and deduction rate returned.

HMRC’s standard rates are 20% for registered subcontractors, 30% for unregistered subcontractors and 0% for gross-payment status. Do not choose a rate from an invoice or an old deduction statement.

Start with the gross payment, remove VAT and then deduct qualifying direct material costs and other permitted items under HMRC’s calculation. Plant hire, fuel, manufacturing and materials supplied by another party can need closer analysis. Keep invoices that separate labour, materials and VAT.

Give the subcontractor a payment and deduction statement within HMRC’s required period. The statement supports the subcontractor’s tax credit, so contractor and subcontractor records should agree by payment date and tax month.

For each tax month, reconcile subcontractor invoices, payments, verification results, materials, deductions and statements to the CIS return. File the return and pay deductions through the payroll process by the applicable dates, even if accounts are prepared only annually.

Before filing, check that no employee, agency worker, labour-only subcontractor or company has been omitted or duplicated. If no subcontractors are paid for a period, follow HMRC’s current nil-return or inactivity process rather than assuming silence is enough.

The domestic reverse charge can apply to specified construction services between VAT-registered businesses where the customer reports the VAT. End-user and intermediary-supplier rules, the type of supply and the customer’s status all matter. CIS treatment is relevant but does not answer the VAT question by itself.

Agree the status with the customer, use the correct invoice wording and tax code, and make sure the bookkeeping does not treat reverse-charge VAT as ordinary output tax or omit the corresponding entries.