How Do I Handle CIS Payments for Labour-Only Subcontractors?

If you pay labour-only subcontractors, you must follow CIS rules carefully. Find out how to calculate deductions, submit returns, and stay compliant with HMRC.

Introduction

If you operate in the construction industry and hire subcontractors who provide only labour, you must follow the rules of the Construction Industry Scheme (CIS). Labour-only subcontractors are common in construction — they work on-site but do not supply materials, tools, or equipment as part of their work.

Handling payments for these subcontractors correctly is essential to stay compliant with HMRC. This article explains how to manage CIS payments for labour-only subcontractors, how deductions work, and the steps you need to take before making any payments.

Understanding Labour-Only Subcontractors

A labour-only subcontractor provides their skills and time but not materials or machinery. Examples include bricklayers, plasterers, electricians, and decorators who work under your direction or as part of a team on your project.

Because they are not employees, they are treated as self-employed for tax purposes, and CIS requires contractors to deduct tax from their payments before passing it to HMRC.

Registering as a Contractor Under CIS

If you pay labour-only subcontractors, you must be registered as a CIS contractor with HMRC. Registration can be completed online or by contacting the CIS helpline.

Once registered, you will need to:

  • Verify each subcontractor with HMRC before paying them.

  • Deduct the correct amount of tax from their labour payments.

  • Submit monthly CIS returns to report all payments and deductions.

  • Provide each subcontractor with a payment and deduction statement.

Failing to register or verify subcontractors correctly can result in penalties and higher tax deductions.

Verifying Subcontractors with HMRC

Before paying any labour-only subcontractor, you must verify their details with HMRC to confirm their tax status. This process tells you how much tax to deduct from their payments.

You can verify subcontractors through:

  • HMRC’s CIS online service.

  • Your company’s CIS-compliant accounting software.

  • The CIS helpline by phone.

Once verified, HMRC will instruct you to apply one of three deduction rates:

  • 20% for registered subcontractors.

  • 30% for unregistered subcontractors.

  • 0% (gross payment status) if HMRC has approved the subcontractor to receive payments without deductions.

Calculating Deductions for Labour-Only Subcontractors

CIS deductions apply only to the labour element of the payment. You should not deduct tax on materials, equipment, or VAT.

If your subcontractor provides an invoice that includes both labour and materials, you must separate the labour portion and apply the CIS deduction only to that amount.

Example:
You receive an invoice for £1,000, which includes £200 for materials and £800 for labour. The subcontractor is verified at 20%.

  • Deduction: 20% of £800 = £160.

  • Payment to subcontractor: £1,000 £160 = £840.

  • £160 must be paid to HMRC by the 22nd of the following month (if paying electronically).

This ensures the subcontractor’s materials are not taxed under CIS, and HMRC receives the correct amount of Income Tax.

Paying Subcontractors

Once you have calculated the correct deduction:

  1. Pay the subcontractor the remaining balance after deducting CIS tax.

  2. Send them a CIS payment and deduction statement showing:

    • Gross payment amount.

    • Amount of deduction.

    • Net amount paid.

    • Your company’s name, address, and UTR.

    • The subcontractor’s name and UTR.

These statements are essential for subcontractors to claim CIS deductions on their Self Assessment tax returns or offset them against Corporation Tax if they are limited companies.

Paying HMRC

After making deductions from subcontractor payments, you must pay those amounts to HMRC. The deadlines are:

  • By the 19th of each month if paying by post.

  • By the 22nd of each month if paying electronically.

Payments should include all deductions made during the previous tax month (6th to 5th).

If you are also registered as an employer under PAYE, CIS deductions are paid alongside your PAYE and National Insurance liabilities using your HMRC PAYE reference.

Filing Monthly CIS Returns

As a contractor, you must submit a monthly CIS return to HMRC. The return details:

  • All subcontractors you paid during the month.

  • The total amount paid to each subcontractor.

  • The amount of CIS tax deducted.

  • Whether any subcontractors had gross payment status.

The return is due by the 19th of each month, following the end of the tax month. Even if you did not pay any subcontractors that month, you must submit a nil return.

Failure to submit your return on time can result in penalties, starting at £100 for being one day late and increasing over time.

Record Keeping

You must keep detailed CIS records for at least three years. These should include:

  • Subcontractor invoices.

  • Verification details from HMRC.

  • CIS payment and deduction statements.

  • Monthly CIS returns and payment receipts.

Keeping accurate records ensures you can resolve any disputes and respond to HMRC queries or audits.

Common Mistakes to Avoid

  • Failing to verify subcontractors: This can result in incorrect deductions or penalties.

  • Applying deductions to materials or VAT: CIS applies only to labour costs.

  • Missing filing deadlines: Late CIS returns lead to fines.

  • Not providing deduction statements: Subcontractors need these to reclaim their tax.

An accountant can help prevent these mistakes by handling CIS processing and submissions on your behalf.

Example Scenario

Sarah runs a small construction business. She hires three labour-only subcontractors to help complete a project. Before paying them, she verifies each subcontractor with HMRC. Two are registered (20% rate) and one is unregistered (30% rate).

Sarah’s accountant calculates the deductions, pays the subcontractors the correct net amounts, files the CIS return by the 19th, and pays HMRC by the 22nd. At the end of the year, the subcontractors use their CIS statements to claim their tax refunds.

By following these steps, Sarah remains fully compliant with HMRC and avoids penalties.

The Role of an Accountant

An accountant experienced in CIS can make managing labour-only subcontractor payments much easier. They can:

  • Verify subcontractors and calculate deductions accurately.

  • Submit monthly CIS returns and make payments to HMRC.

  • Keep digital records for compliance.

  • Reconcile CIS payments and deductions in your accounts.

  • Advise on tax-efficient ways to manage cash flow.

Working with an accountant ensures you stay compliant and saves time so you can focus on running your business.

Conclusion

Handling CIS payments for labour-only subcontractors involves verifying each subcontractor, calculating deductions correctly, submitting monthly returns, and paying HMRC on time. The rules are strict, and errors can lead to penalties or cash flow issues.

By keeping accurate records and, where possible, working with an accountant, you can manage your CIS obligations smoothly and stay fully compliant with HMRC. Doing things correctly ensures both your business and your subcontractors benefit from an efficient and transparent payment process.