CIS Returns Explained for UK Contractors and Subcontractors

The Construction Industry Scheme (CIS) trips up lots of UK businesses with avoidable errors and penalties. This guide explains, in plain English, what CIS is, who needs to register, how deductions work, and how to file your monthly return smoothly—plus how to handle it in Xero.

Who needs to register for CIS?

• Contractors

  • If you pay subcontractors for construction work, you must register as a contractor and verify each subcontractor with HMRC.

• Subcontractors

  • If you’re paid for construction work by contractors, register as a subcontractor so deductions are taken at the correct rate (20% standard or 0% gross if approved; 30% if unverified).

What work is covered by CIS?

• Included: Site preparation, demolition, building work, alterations, repairs, decorating, installation of systems (heating, lighting), civil engineering.

• Generally excluded: Architecture/surveying, carpet fitting, materials-only supply, scaffolding hire with no labour (check specifics), clerical work.

CIS deductions, rates, and what’s deductible

• Rates

  • 20%: Verified subcontractors

  • 30%: Unverified subcontractors

  • 0%: Gross payment status (GPS) subcontractors

• Deduction base

  • Labour (after allowable materials, VAT on materials, plant hire with operator, some consumables) is subject to CIS deduction.

  • Do not deduct CIS on: VAT charged by the subcontractor, separately itemised materials, or fuel for machinery if separately invoiced as materials.

• Evidence

  • Keep invoices, subcontractor verification numbers, and deduction statements.

Monthly CIS return — what contractors must do

• Verify subcontractors with HMRC before paying (via software or HMRC portal).

• Deduct the right amount from labour, pay the subcontractor net, and give a CIS payment & deduction statement each month.

• File CIS return by the 19th of the following month and pay over deductions to HMRC by the 22nd (electronic).

• Make the monthly declaration that all subcontractors are verified and payments are correctly treated (including employment status checks).

Handling CIS in Xero (workflow)

• Enable CIS

  • In Xero, turn on CIS (if using Xero CIS beta/feature) or use CIS-enabled add-ons; otherwise, set up custom tax rates and tracking with care.

• Set up suppliers as subcontractors

  • Record their UTR, verification status, CIS rate (20/30/0), and default ledger codes.

• Enter bills

  • Split materials vs labour on separate lines; apply CIS only to labour lines. Ensure VAT treatment is correct and not deducted in CIS.

• Process payments

  • Pay the net amount (gross labour + materials + VAT − CIS deduction). Email remittance plus CIS deduction statement.

• CIS return report

  • Run the CIS report (or a custom report) to get monthly totals by subcontractor; reconcile to HMRC submission.

• Post the liability

  • Record CIS suffered/withheld to your CIS control account and reconcile when paying HMRC.

Common CIS mistakes (and fixes)

• Not verifying subcontractors

  • Fix: Verify before the first payment; update rates when HMRC status changes.

• Deducting CIS on materials or VAT

  • Fix: Separate invoice lines; only deduct on labour; review supplier defaults.

• Paying gross when subcontractor isn’t on GPS

  • Fix: Apply 20%/30% as verified; keep verification records.

• Missing the monthly deadline

  • Fix: Calendar reminders and a fixed month-end checklist; file by the 19th, pay by the 22nd.

• Treating workers as subcontractors when they’re employees

  • Fix: Do a status assessment; if in doubt, take HR/accountant advice—incorrect status can trigger penalties.

• Not issuing CIS statements

  • Fix: Send a CIS payment & deduction statement each month; Xero/add-ons can generate these.

Simple monthly checklist you can copy

• Before payment: Verify subcontractors; check invoice splits; confirm VAT and CIS rates.

• Payment day: Pay net; send remittance + CIS statement.

• Month-end (by the 19th): Run CIS totals, submit return, make declaration.

• Payment to HMRC (by the 22nd): Pay CIS deductions; reconcile CIS control.

FAQs

• Do subcontractors reclaim CIS deducted? Yes. Limited companies offset CIS suffered against PAYE liabilities; sole traders reclaim via their Self Assessment.

• Do I need to operate CIS on VAT? No. CIS is calculated on labour excluding VAT; do not apply CIS to VAT.

• What about the Domestic Reverse Charge (DRC) for VAT? Separate from CIS. For certain supplies between VAT‑registered construction businesses, no VAT is charged; the customer accounts for VAT. Ensure your invoices/processing reflect DRC where required.

Want CIS handled correctly every month? We’ll set up your CIS process in Xero, verify subcontractors, split invoices properly, file returns, and reconcile payments—on time, every time. Book a free consultation!