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Calculating CIS Tax Deductions in the UK

The Construction Industry Scheme (CIS) is a tax deduction scheme in the UK that involves tax being deducted at source from payments relating to construction work. The CIS tax deductions are calculated based on labour and material costs. Here's a step-by-step guide on how to calculate CIS tax deductions.

Calculating CIS Tax Deductions in the UK

Understanding Different CIS Tax Rates in the UK

The Construction Industry Scheme (CIS) in the UK has three different tax rates applicable to subcontractors. These rates are 30%, 20%, and 0%. The rate applied depends on the subcontractor's registration status with the scheme and their business circumstances.

The 30% CIS Tax Rate

The highest CIS tax rate of 30% applies to subcontractors who choose not to register for the CIS. This rate is typically unattractive for most subcontractors due to its significant impact on their cash flow. Therefore, most subcontractors opt to register for the CIS to benefit from a lower tax rate. However, businesses that do not regularly undertake work covered by the CIS, or new businesses that are not aware they should be registered, may end up paying this rate.

The 20% CIS Tax Rate

Subcontractors who register with the CIS are subject to a lower tax rate of 20%. These subcontractors are known as net subcontractors. This rate is typically chosen by smaller subcontractors, including one-man bands or owner-managed companies, often with a turnover under £30,000. The reason for this is that the deductions can be used to offset against their personal tax liabilities or their corporation tax liability. However, as a business expands beyond a certain size, the impact on cash flow of a 20% CIS tax rate becomes too significant, and they may choose to register as a gross subcontractor.

The 0% CIS Tax Rate

Businesses can choose to register for gross payment status, which results in a CIS tax rate of 0%. These businesses, known as gross subcontractors, receive payments in full from their contractors with no deductions. This is beneficial for cash flow in the short term. However, these businesses must be disciplined and put something aside to save up for their end-of-year tax liabilities. Gross registered subcontractors also avoid the administrative burden of chasing up CIS tax deduction paperwork from contractors.

The choice of CIS tax rate is largely a matter of personal preference and business circumstances. However, it is generally recommended to apply for gross status when possible. While the 30% and 20% rates may involve paying taxes in advance, the 0% rate requires businesses to manage their tax liabilities independently. Regardless of the rate chosen, it is crucial to ensure correct registration with the CIS to avoid unnecessary tax deductions.

How to Calculate CIS Tax Deductions – A Step-by-Step Process

Step 1: Identify the Subcontractor's CIS Status

The subcontractor's CIS status determines the CIS tax rate to apply. There are three different rates: gross, net, or not registered. HMRC provides the deduction tax rate when completing the subcontractor verification.

Step 2: Determine the VAT Status

The invoice provided by the subcontractor should state the VAT rate charged. In the construction industry, some invoices are treated as reverse VAT. If you're unsure, you can use a VAT Reverse Charge Construction Solver to see if reverse VAT applies.

Step 3: Calculate the Labour and Materials Amount

The invoice should state the split between labour and materials. This is a requirement of the subcontractor unless they are registered with gross payment status. To use the CIS tax deduction calculator correctly, it is important to identify the qualifying materials. Only enter qualifying materials in the materials box. The rest is added to the labour. For example, travel costs or accommodation fees are not qualifying materials, so they should be added to the labour value.

Step 4: Calculate the CIS Tax Deduction

The CIS tax deduction is calculated by subtracting the cost of materials from the gross amount, which gives a labour amount. Then, the contractor calculates the tax to deduct by applying the CIS tax rate to the labour amount. For example, if the gross amount is £700, the cost of materials is £200, and the CIS tax rate is 20%, the CIS tax deduction would be £100 (£500 * 20%).

Step 5: Verify the Calculations

After entering the figures, it is important to check the Net, VAT, and Gross figures agree with the invoice. The CIS tax deduction calculator will work out how much CIS tax to deduct. This amount is payable to HMRC on the monthly return. The final figure is the amount to pay to the subcontractor. If CIS tax has been deducted, the contractor must provide a payment and deduction statement to the subcontractor.

Step 6: Use Online Calculators for Convenience

For convenience, there are online CIS Tax Deduction Calculators available that can assist in calculating the CIS deductions. These calculators can handle all types of CIS calculations including 30%, 20%, and 0% tax rates.

Remember, these calculations are for illustrative purposes only and are not a substitute for professional advice. Always consult with a tax professional or accountant when dealing with CIS tax deductions.

CIS and VAT: Understanding the Order of Calculation

In the UK's Construction Industry Scheme (CIS), the tax deductions are calculated before Value Added Tax (VAT) is applied. This is a crucial aspect to understand for businesses operating within the construction sector.

CIS Deductions and VAT: The Process

When a contractor pays a subcontractor for a job, the contractor is required to make a CIS deduction from the subcontractor's pay. This deduction is then passed on to HM Revenue and Customs (HMRC). The CIS deduction is calculated based on the subcontractor's pay excluding VAT. This means that the CIS deduction is made before VAT is added to the invoice.

For example, if a subcontractor charges £100 for a job and the CIS deduction rate is 20%, the contractor will make a CIS deduction of £20. The VAT is then calculated on the net amount of £80, not the original £100.

The Impact of the VAT Reverse Charge

From March 2021, the VAT reverse charge mechanism was introduced for the construction industry. Under this system, the customer accounts for the supplier's output VAT. This means that the supplier invoices for the net amount of the service, and the customer then calculates and pays the VAT directly to HMRC.

The VAT reverse charge applies to supplies of construction work, including materials, made at the standard or reduced rate of VAT. It is important to note that the CIS deductions are still calculated before the VAT reverse charge is applied.

Understanding the order of CIS and VAT calculations is essential for businesses in the construction industry. It ensures accurate invoicing and correct payments to HMRC. It is always recommended to seek advice from a tax professional or accountant to ensure compliance with these complex regulations.

The Role of a CIS Tax Accountant in the CIS Tax

The Role of a CIS Tax Accountant in the CIS Tax

Expert Guidance on CIS Tax Regulations

A CIS tax accountant can provide expert guidance on the complex regulations surrounding the Construction Industry Scheme (CIS). They can help you understand the different CIS tax rates and how they apply to your business. This includes explaining the differences between the 30%, 20%, and 0% tax rates, and advising on the best rate for your business based on your circumstances.

Assistance with CIS Registration

Registering for the CIS can be a complex process, especially for businesses new to the construction industry. A CIS tax accountant can assist with this process, ensuring that all necessary paperwork is completed correctly and submitted on time. They can also help you apply for gross payment status if this is beneficial for your business.

Accurate Calculation of CIS Tax Deductions

Calculating CIS tax deductions can be a challenging task, especially for businesses with multiple contracts and varying rates of tax. A CIS tax accountant can help ensure these calculations are done accurately, helping you avoid potential penalties from HMRC for incorrect deductions.

Preparation and Submission of CIS Returns

CIS tax accountants can also assist with the preparation and submission of monthly CIS returns to HMRC. These returns can be complex and time-consuming to prepare, especially for businesses with a large number of subcontractors. An accountant can take care of this task, freeing up your time to focus on running your business.

Representation in Disputes with HMRC

If you have a dispute with HMRC over your CIS tax deductions or returns, a CIS tax accountant can provide valuable assistance. They can represent your business in communications with HMRC, helping to resolve any issues and ensuring your business is treated fairly.

Advice on Tax Planning and Efficiency

Finally, a CIS tax accountant can provide advice on tax planning and efficiency. They can help you understand how to minimise your tax liabilities and take advantage of any available reliefs or allowances. This can be particularly beneficial for businesses registered for gross payment status, who need to manage their end-of-year tax liabilities independently.

A CIS tax accountant can provide invaluable assistance for businesses operating in the UK construction industry. From helping with CIS registration and calculating tax deductions, to preparing CIS returns and representing your business in disputes with HMRC, their expertise can help ensure your business remains compliant with CIS regulations and operates as tax-efficiently as possible.

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