CIS for Sole Traders: What Subcontractors Must Know

The Construction Industry Scheme is one of the most commonly misunderstood parts of the UK tax system. If you are a sole trader working as a subcontractor in construction, CIS directly affects your cash flow, your tax return, and how you manage your business finances. Getting it right means getting paid properly and avoiding unexpected tax bills.

Under CIS, contractors — the businesses that hire you — must deduct money from your payments and pass it directly to HMRC. These deductions are advance payments towards your tax and National Insurance liability. The standard deduction rate is 20% if you are registered with HMRC under CIS. If you are not registered, the rate is 30%. There is also a gross payment status that allows you to receive payments without deductions, but this requires meeting strict turnover and compliance criteria.

Registration is straightforward and should be done as soon as you start working as a subcontractor. You register with HMRC by phone or online, providing your Unique Taxpayer Reference and National Insurance number. Once registered, contractors verify you with HMRC before making each payment, and they should deduct at the 20% rate rather than 30%.

The deductions are not an additional tax. This is a crucial point that many subcontractors misunderstand. The money deducted under CIS is a credit against your income tax and National Insurance liability. When you file your Self Assessment return, you declare your gross income, calculate your tax, and then deduct the CIS payments already made. In many cases, subcontractors receive a refund because the CIS deductions exceeded their actual tax liability — particularly if they have significant allowable expenses that reduce their taxable profit below the level implied by the 20% flat deduction.

Record-keeping under CIS requires you to keep every payment and deduction statement your contractor provides. These statements show the gross payment, the amount deducted, and the net amount you received. You need these for your tax return and to claim credit for the deductions. If a contractor does not provide a statement, chase it — without documentation, claiming credit for deductions becomes much harder.

Under MTD, CIS subcontractors will record their income and expenses quarterly just like any other sole trader. The CIS deductions need to be recorded accurately so that your tax position is clear throughout the year, not just at the end. Software like Accounted handles CIS income and deductions, making it straightforward to see your actual position after deductions at any point.

Expenses for construction subcontractors are often substantial. Tools, equipment, protective clothing, travel to sites, van costs, materials (if you supply your own), training, and insurance are all allowable. Many subcontractors undervalue their expenses, leading to an overestimate of their tax liability. Track everything — the difference between claiming your expenses properly and not can be thousands of pounds.

The cash flow impact of CIS is significant. If you receive a payment of £1,000, the contractor deducts £200 and you receive £800. But your actual expenses against that £1,000 of income might be £300, meaning your taxable profit is only £700 and your actual tax liability is less than the £200 already deducted. This is why many CIS subcontractors are owed refunds at the end of the year.

For subcontractors who also employ people or use their own subcontractors, the obligations increase. If you pay a subcontractor more than £1,000 in a year, you may need to register as a contractor under CIS and make deductions from their payments. This is a separate obligation from your own subcontractor status.

Gross payment status is worth pursuing if you qualify. It requires a turnover of at least £30,000 per year and a clean compliance record with HMRC — all tax returns and payments must be up to date. The benefit is obvious: receiving your full payment without deductions improves cash flow significantly. However, you still owe the same tax — it just is not deducted at source.

One final practical point: when quoting for work, make sure your pricing accounts for CIS deductions if applicable. Many subcontractors quote a net amount without considering that 20% will be deducted. Your quote should reflect the gross amount, with the deduction being a payment mechanism rather than a reduction in your price.