When a limited company works as a subcontractor, the paying contractor may deduct Construction Industry Scheme tax from the labour element of its payment. These deductions are advance payments towards the company’s tax position, not an expense and not a deduction that should simply be entered on the Corporation Tax return.
For construction companies, the reclaim process starts during the tax year. Accurate monthly reporting can reduce payments to HMRC and protect cash flow.
How CIS deductions work
A registered subcontractor is normally paid after CIS has been deducted at 20%. A 30% rate can apply if the business cannot be verified, while gross payment status allows qualifying businesses to receive payment without deduction. Businesses should also ensure they meet the relevant CIS registration and compliance requirements.
It is necessary to submit a statement that should state the total amount of payment and CIS deducted from the payment. This should be done within 14 days from the date the particular tax period ends.
Show the total sales as turnover, the net balance received in the bank account and the CIS deduction as the balance receivable. Considering the CIS as an expense leads to underreporting of profits.
Reclaim CIS through payroll
A limited company uses its PAYE scheme to obtain credit for CIS suffered. It sends its Full Payment Submission as normal and reports the cumulative CIS deductions suffered on an Employer Payment Summary. This is separate from employee status risks, which can affect how workers should be treated for PAYE and CIS purposes.
HMRC sets the credit against liabilities including:
- PAYE tax deducted from employees
- Employer and employee National Insurance
- Student loan deductions
- CIS deducted from subcontractors paid by the company
If CIS suffered exceeds these liabilities, the unused amount carries forward against later PAYE and CIS liabilities within the same tax year.
The Employer Payment Summary should reach HMRC by the 19th after the tax month so that the reduction is applied to the correct period. The figure reported is cumulative from 6 April, not merely the amount deducted in the latest month.
Step by step reclaim process
1. Collect deduction statements
Get a payment and deduction certificate from all contractors. Verify the company name, payment date, gross payment, and deduction. In case a certificate is not available, get another one immediately because HMRC might need proof.
2. Reconcile the accounting records
Match each statement to the sales invoice, remittance advice and bank receipt. Separate VAT, materials, retention and CIS so that a short bank receipt is not automatically treated as a CIS deduction.
3. Update the CIS control account
Maintain a schedule by contractor and tax month. It should reconcile deductions supported by statements with credits already used.
4. Submit the Employer Payment Summary
Report the total deductions suffered since 6 April through payroll software. Do not include CIS deducted from subcontractors in the field for CIS suffered.
5. Check the HMRC account
Confirm that the credit appears and has reduced the intended PAYE liability. HMRC says the submitted claim and account balance can normally be viewed online shortly after the Employer Payment Summary is processed.
6. Claim the remaining balance after year end
After 5 April, reconcile the final payroll submissions and CIS records, then claim any unused balance online or by post. HMRC may first use the credit against overdue PAYE or Corporation Tax. The remainder can be refunded or allocated to VAT or upcoming Corporation Tax.
Information needed for a claim
The company will normally need:
- Company name, address and telephone number
- PAYE reference
- Corporation Tax Unique Taxpayer Reference
- Total CIS suffered for the tax year
- Amount already used against PAYE and CIS liabilities
- Payment and deduction statements
- Relevant bank statements and payroll records
All relevant Full Payment Submissions, Employer Payment Summaries, monthly CIS returns and Company Tax returns must be submitted before a repayment claim is made. Claims can normally be made online or by post for the previous six tax years.
Why CIS refunds are delayed
The HMRC checks the claim against its records of CIS and PAYE. Any discrepancies are caused by incorrect details about the company, invoices for a previous sole trader or monthly figures instead of cumulative amounts.
The HMRC has the power to limit or revoke any unsubstantiated CIS credits. It is important to have a clear audit trail of invoice to bank statement, deduction statement, account and EPS.
Other errors include missing payroll submissions, confusing CIS suffered with CIS deducted and mixing tax years. Limited companies must use payroll reporting, not the Corporation Tax return, as the reclaim route.
Current year refunds
A refund is usually claimed after the CIS year end, once the tax year has ended. HMRC permits an earlier claim in limited circumstances, including where the company has stopped trading or deductions continued after it obtained gross payment status. Supporting payment and deduction statements and bank statements are required.
How Construction Tax accountants can help
Construction Tax accountants can manage the accounting and payroll evidence needed for a valid claim. Specialist review also identifies whether the credit should reduce PAYE, be refunded or be reallocated, helping businesses with cash flow management and reducing the impact of unnecessary deductions.
- Reconcile contractor statements with invoices, retentions and bank receipts
- Maintain a separate CIS suffered control account
- Submit or correct cumulative Employer Payment Summary figures
- Check PAYE, CIS and Corporation Tax records before the claim
- Prepare the year end repayment or reallocation request
- Respond to HMRC evidence queries and reconcile disputed balances
- Review gross payment status where repeated deductions restrict cash flow
Frequently asked questions
Can a company reclaim CIS through its Corporation Tax return?
No. CIS suffered is normally reported through the Employer Payment Summary. HMRC warns that using the Corporation Tax return can result in an incorrect return or penalty.
Can CIS deductions reduce PAYE during the year?
Yes. It can reduce qualifying PAYE, National Insurance, student loan and CIS liabilities. Unused credit carries forward within the same tax year.
How long does an HMRC CIS refund take?
HMRC says it will usually respond to a limited company claim within eight weeks. Missing returns, unmatched contractor records or insufficient evidence can extend the process.
What if the contractor did not issue a deduction statement?
Ask the contractor for a replacement. If it cannot be obtained, HMRC allows the company to provide details of the contractor, payment dates and the reason the evidence is unavailable.
