Calculating CIS deductions correctly is crucial for both contractors and subcontractors. These deductions act as advance tax payments to HMRC, helping subcontractors meet their tax obligations. Failing to calculate CIS deductions accurately can lead to tax reporting errors and potential penalties.
Our guide will take you through the process of calculating CIS deductions step by step. Following these steps will help you avoid overpaying or underpaying subcontractors, stay compliant with HMRC, and keep your tax management on track while reducing penalty risks.
What Are CIS Tax Deductions?
CIS tax deductions are amounts that contractors must deduct from subcontractors’ payments and pass on to HM Revenue and Customs (HMRC). These deductions are considered advance payments towards the subcontractor’s tax and National Insurance contributions. The amount deducted depends on the subcontractor’s registration status with HMRC.
How to Calculate CIS Deductions: A Step-by-Step Guide
Calculating CIS deductions may seem complicated at first, but it is simple once you break it down. Follow these four steps to ensure accuracy.
Step 1: Determine the Total Invoice Amount
Start by determining the gross amount of the subcontractor’s invoice. This is the total payment they are due, excluding VAT, as VAT is not subject to CIS deductions.
Step 2: Identify Deductible Costs
Next, subtract the cost of materials that the subcontractor has directly paid for and used in the construction work. Acceptable materials include consumable stores, plant hire, fuel (excluding travel), and prefabricated materials. The subcontractor should provide evidence, such as receipts, for these costs. If no evidence is provided, you may estimate the cost based on reasonable assumptions or typical costs for similar materials and work. The estimation should reflect the actual cost as closely as possible.
Step 3: Apply the Correct Deduction Rate
Now, apply the appropriate CIS deduction rate to the remaining amount. Use the following rates:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% for subcontractors with gross payment status
Step 4: Calculate the Deduction
Multiply the adjusted amount (after deducting materials) by the applicable deduction rate.
Step 5: Determine the Net Payment
Subtract the calculated deduction from the adjusted amount to find the net payment to the subcontractor.
Examples of CIS Deductions
Let’s go through some examples to help clarify the process.
Example of Registered Subcontractor
A registered subcontractor invoices £1,000 for a job. The subcontractor is registered under CIS. The gross amount is £1,000, and after deducting £200 for materials, the remaining amount is £800. The CIS deduction at 20% would be £160. The subcontractor will receive £640 (£800 – £160).
Example of Unregistered Subcontractor
An unregistered subcontractor invoices £1,000. After deducting £150 for materials, the remaining amount is £850. The CIS deduction at 30% would be £255. The subcontractor will receive £595 (£850 – £255).
Example for Subcontractor with Gross Payment Status
A subcontractor with a gross payment status receives invoices of £1,000. No deduction is made because the subcontractor is eligible for 0% CIS deductions. The subcontractor will receive the full £1,000.
How to Report and Pay CIS Deductions to HMRC
Once you’ve made the CIS deductions, you need to report them to HMRC.
Once you’ve made the CIS deductions, you need to report them to HMRC. You must report all payments made to subcontractors each month. This includes:
- Details of each subcontractor you have paid.
- Gross amount paid (excluding VAT).
- CIS deductions made.
- Employment status of the subcontractor (confirming they are not employees).
You can file your monthly return using the HMRC CIS online service or Commercial CIS software. Your return must be submitted by the 19th of the month following the payment month. For example, for payments made between 6 May and 5 June, the return is due by 19 June. Late submissions may incur penalties, starting at £100 for a one-day delay, increasing with continued non-compliance.
Paying CIS Deductions to HMRC
You must pay the deductions you’ve made to HMRC monthly or quarterly, depending on your arrangement with HMRC. Payments for CIS deductions are due on the 22nd of the month following the month of payment (or the 19th if paying by post). You can make payments through your PAYE/CIS scheme using methods like bank transfer, direct debit, online services, or post.
Note: If you have employees, combine your CIS payments with PAYE and National Insurance contributions when making a single payment.
What Records to Keep for CIS Compliance with HMRC
Keeping accurate records is essential for CIS compliance. You must keep a record of all payments made to subcontractors, including the gross amounts paid (excluding VAT), the CIS deductions made, and the cost of materials deducted from the gross amount. You should also maintain records of payment and deduction statements provided to subcontractors.
Records should be kept for at least three years after the end of the tax year they relate to. This will help in case of any future audits or inquiries from HMRC. Failure to provide your CIS records when requested by HMRC could lead to a fine of up to £3,000. You can store records in paper form or electronically, but if they are stored electronically, they must be complete and unaltered images of the original documents.
Avoid These Common CIS Deduction Mistakes
Here are some common mistakes to avoid when calculating CIS deductions:
- Miscalculating the deduction rate: Always double-check whether the subcontractor is registered or not.
- Failing to deduct the correct costs: Remember that only specific costs, like materials and plant hire, can be deducted.
- Not keeping accurate records: Ensure you keep all the necessary paperwork in case of a tax audit.
In summary, accurately calculating CIS tax deductions is crucial for both contractors and subcontractors. Always keep accurate records, report the deductions to HMRC on time, and make the necessary payments to avoid penalties. If you have any questions about CIS deductions or need assistance with your calculations, schedule a free consultation with our experts to receive the support you need.
