Under the Construction Industry Scheme a contractor records the full cost of the subcontractor’s work, the amount actually paid and the deduction owed to HMRC, while the subcontractor records the full amount earned as income and the deduction as tax already paid. The monthly payment and deduction statement is the document that ties both sets of books together, and HMRC checks claims for deductions against the contractor’s monthly return, so every statement should be reconciled as it arrives.

How is a CIS deduction worked out?

HMRC’s guidance for contractors sets out the calculation. Start with the gross amount of the subcontractor’s invoice and take away the amounts the subcontractor paid for VAT, materials (only if they bought them directly), consumable stores, fuel other than for travelling, plant hired for the job, and manufacturing or prefabricating materials. The CIS rate given by HMRC on verification is then applied to what is left.

Subcontractor status Deduction rate
Registered and verified (net payment status) 20%
Not registered, or cannot be verified 30%
Gross payment status 0%

The deduction never applies to VAT, which is why the books need VAT, materials and labour shown separately on each invoice. If the subcontractor has no evidence of materials costs, the guidance says the contractor should estimate them. The wider rules on who is in the scheme are covered in the Construction Industry Scheme explained.

What must the payment and deduction statement show?

Regulation 4(8) of the Income Tax (Construction Industry Scheme) Regulations 2005 requires the contractor to give a statement to every subcontractor from whom a deduction has been made. HMRC’s Construction Industry Scheme Reform Manual at CISR12160 and CISR72060 says it must be issued within 14 days after the end of the tax month and must show at least:

  • the contractor’s name and employer’s tax reference;
  • the end date of the tax month in which the payment was made, or the payment date if the statement covers one payment;
  • the subcontractor’s name and Unique Taxpayer Reference, plus the verification number if a higher rate deduction was made because they could not be matched;
  • the gross amount of the payment;
  • the cost of materials that reduced the amount on which the deduction was calculated; and
  • the amount deducted.

Tax months run from the 6th of one month to the 5th of the next, so a statement for the month ending 5 June is due by 19 June. A statement can be emailed only if both sides agree and it can be saved and printed. A replacement for a lost statement must be clearly marked “Duplicate”.

How should a contractor record CIS in the books?

The contractor records the subcontractor’s invoice at its full value as a cost, because that is what the work cost the business. When the invoice is paid, the bank shows only the net payment, and the difference is a liability to HMRC, usually held in a CIS deductions account alongside PAYE. GOV.UK says deductions are paid to HMRC with PAYE by the 22nd of the month, or the 19th if paying by post, and the monthly return is due by the 19th after the end of the tax month.

The CIS records a contractor must keep are the gross amount of each payment invoiced by subcontractors excluding VAT, the deductions made and, where deductions were made, the cost of materials invoiced excluding VAT. GOV.UK says these must be kept for at least 3 years after the end of the tax year they relate to, and that a contractor could be fined up to £3,000 if it cannot show its CIS records when asked. Those records also support the contractor’s own accounts, which have longer retention periods.

How should a subcontractor record CIS deductions?

The subcontractor records the full invoice value as sales. When the contractor pays, the bank receives the net amount and the deduction is recorded as tax suffered, not as an expense. GOV.UK describes deductions as advance payments towards the subcontractor’s tax and National Insurance bill.

  • Sole traders and partners report total pay before deductions as income on the Self Assessment return and the total deducted as CIS deductions. HMRC then sets the deductions against the tax due. In the business accounts, deductions are a payment of the owner’s personal tax rather than a cost of the trade.
  • Limited companies recover deductions through payroll. GOV.UK says the company sends its Full Payment Submission as usual and an Employer Payment Summary showing CIS deductions suffered for the year to date, and HMRC sets them against the PAYE due. Unused deductions can be carried forward within the same tax year, and a refund can be claimed after the year ends. The guidance warns against using the Corporation Tax return to pay tax with deductions. In the company’s books the deduction is an asset, an amount recoverable from HMRC, until it has been set off or repaid.

What does it look like in figures?

Illustration only. A subcontractor with net payment status, not registered for VAT, invoices a contractor for £1,400: £1,000 labour and £400 of materials bought directly.

Item Contractor’s books Subcontractor’s books
Invoice value Cost £1,400 Sales £1,400
Deduction at 20% of £1,000 Owed to HMRC £200 Tax suffered £200
Bank Paid £1,200 Received £1,200

The statement for that tax month shows gross £1,400, materials £400 and deduction £200. A common error is to record sales of £1,200 from the bank receipt, which understates turnover and loses the £200 credit.

How do you reconcile CIS statements?

Reconciliation is more than tidiness. CISR72060 says HMRC checks a statement against the contractor’s monthly return, and where the statement does not agree with what the CIS system shows, HMRC may not be able to accept the claim for credit or repayment. CISR73620 adds that in a Self Assessment enquiry a compliance officer may ask for bank statements and restrict the claim to what bank statements and statements together support.

  1. Each month, match every statement to the sales invoice and to the net receipt in the bank. The gross figure should equal the invoice excluding VAT, and gross less deduction should equal the money received, which the monthly bank reconciliation will confirm.
  2. Keep a running schedule of statements by contractor and tax month, and chase any month where a payment was received but no statement arrived.
  3. For a company, agree the year to date total on the Employer Payment Summary to the schedule before each submission.
  4. At the year end, agree the total CIS deductions figure on the return or the final Employer Payment Summary to the schedule, and keep the statements. Section 12B(4A) of the Taxes Management Act 1970 requires CIS statements to be kept as records in their own right, not just the information in them, so a scan alone is not enough (see photos of receipts and HMRC).

If a contractor has ceased trading and statements cannot be obtained, GOV.UK says the subcontractor should write to HMRC with the contractor’s details and the reason the statements are missing.

How does VAT interact with CIS bookkeeping?

The CIS deduction is always calculated on an amount excluding VAT. Where the domestic reverse charge applies, the subcontractor’s invoice shows no VAT to be paid and the contractor accounts for it instead, so the VAT and CIS entries must be kept on separate lines. See the VAT domestic reverse charge for construction.

What mistakes come up most often?

  • Subcontractors posting the net receipt as sales, so turnover and the CIS credit are both understated.
  • Contractors calculating the deduction on the VAT inclusive total or failing to exclude materials.
  • Companies claiming deductions on the Corporation Tax return instead of through the Employer Payment Summary.
  • Claiming deductions from statements that were never matched to the contractor’s return, which HMRC may reject. CIS claims are a frequent enquiry point, as covered in tax investigation insurance for CIS subcontractors.
  • Contractors forgetting that a subcontractor not included on a return in the current or last 2 tax years must be verified again.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.