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

At Towerstone Accountants we provide specialist CIS accountancy services for contractors, subcontractors, and construction businesses across the UK. We created this webpage for people working in construction who want clear guidance on CIS deductions, refunds, verification, and monthly return responsibilities, without jargon. Our aim is to help you stay compliant with HMRC, avoid penalties, and keep your cash flow and records under control.

This is a situation I deal with constantly, particularly with small and growing construction businesses who are taking on extra hands as workloads increase. Labour-only subcontractors are common across the industry, but they also sit right at the point where CIS mistakes are most likely to happen. Payments feel simple, there are no materials involved, and it can be tempting to treat them like casual labour rather than stepping back and applying the rules properly.

In reality labour-only subcontractors require more care, not less. Because the entire payment relates to labour, every pound is potentially subject to CIS, and because the line between subcontractor and employee can sometimes feel thin, HMRC scrutiny tends to be higher. Get it right and the process becomes routine. Get it wrong and problems can build quietly before surfacing all at once.

In this article I am going to explain how to handle CIS payments for labour-only subcontractors in a clear and practical way. I will cover what labour-only means in a CIS context, how verification and deductions work, how payments should be processed and reported, and the mistakes I see most often. My aim is to give you a system you can rely on rather than a checklist you forget after the first job.

What labour-only subcontractors actually are

A labour-only subcontractor is someone you engage purely for their time and skills, rather than to supply a complete job or materials. They turn up, work under your direction, and are paid for the hours or days they work.

Under CIS this distinction matters because there are no materials to separate out. The entire payment is treated as labour, which means the entire amount is within scope for CIS deductions.

Labour-only subcontractors are still subcontractors, not employees, provided the working arrangement genuinely reflects self employment. CIS applies because the work itself is construction work, not because of how simple the payment looks.

Confirming employment status before anything else

Before CIS even enters the conversation, the first thing I always look at is employment status.

Just because someone invoices you or calls themselves self employed does not automatically make them a subcontractor in HMRC’s eyes. Labour-only arrangements are where misclassification risks are highest.

You need to consider factors such as control, substitution, financial risk, and how integrated the worker is into your business. If they are effectively treated like an employee, CIS is not the answer, PAYE is.

Handling CIS correctly starts with making sure CIS is the correct regime in the first place. If someone should be on payroll, using CIS will not protect you.

Registering as a CIS contractor

If you are paying labour-only subcontractors for construction work, you must be registered as a CIS contractor.

This applies whether you are a sole trader, partnership, or limited company. Once registered, you are responsible for operating CIS correctly on every qualifying payment.

Many people assume registration only matters if they use multiple subcontractors or larger firms. That is not the case. One labour-only subcontractor is enough to trigger the obligation.

Verifying labour-only subcontractors

Every labour-only subcontractor must be verified with HMRC before payment, unless they have already been verified previously and nothing has changed.

Verification confirms whether the subcontractor is registered for CIS and what deduction rate applies. For most registered subcontractors this will be 20 percent. If they are not registered, it will be 30 percent.

Because labour-only payments are entirely labour, verification has a direct and immediate impact on how much the subcontractor takes home. Failing to verify leads to higher deductions and unhappy conversations.

Understanding the deduction calculation

For labour-only subcontractors the CIS calculation is straightforward, but unforgiving.

There are no materials to exclude, so the deduction is applied to the full payment amount, excluding VAT if the subcontractor is VAT registered.

For example, if a labour-only subcontractor invoices £1,000 for a week’s work and is registered under CIS, the deduction is 20 percent of £1,000, which is £200. They receive £800 and £200 is paid to HMRC.

There is no scope to reduce this through materials or incidental costs.

Handling VAT with labour-only subcontractors

If the labour-only subcontractor is VAT registered, VAT is charged in addition to their labour fee and is not subject to CIS deductions.

This often causes confusion. The CIS deduction is calculated on the net labour charge only, not on VAT.

Using the same example, if the subcontractor charges £1,000 plus VAT, the CIS deduction is still £200, not £240. The VAT is paid in full.

Separating VAT clearly on invoices avoids errors and disputes.

Paying labour-only subcontractors correctly

Once the deduction is calculated, you pay the subcontractor the net amount and retain the deducted tax to pass to HMRC.

It is important to understand that the deducted amount is not your money. It is tax collected on HMRC’s behalf and should be treated accordingly.

Using CIS deductions to support cash flow is one of the fastest ways I see contractors fall into trouble. When payment deadlines arrive, the shortfall suddenly becomes very real.

Issuing CIS payment statements

Every time you make a payment to a labour-only subcontractor, you must provide a CIS payment and deduction statement.

This statement shows the gross amount, the amount deducted, and the net payment. It is essential for the subcontractor’s tax records and for claiming offsets or refunds later.

Failing to issue statements creates frustration for subcontractors and makes your own records harder to reconcile.

Monthly CIS returns

All CIS payments to labour-only subcontractors must be included in your monthly CIS return.

The return covers the tax month from the 6th to the 5th and must be submitted by the 19th of the following month. Even if you only paid one labour-only subcontractor once, it still needs to be reported.

Nil returns are required where no payments are made, which is often missed during quiet periods.

Late returns trigger automatic penalties, which increase the longer they are outstanding.

Paying CIS deductions to HMRC

CIS deductions must be paid to HMRC by the 22nd of the following month if paying electronically.

They are usually paid alongside PAYE liabilities, although they are accounted for separately.

Keeping a clear record of what has been deducted and what has been paid avoids mismatches that can take months to resolve.

Record keeping for labour-only CIS payments

Good records are especially important with labour-only subcontractors because there is less complexity to hide mistakes.

You should retain invoices, verification records, payment statements, and proof of payment. These records support your CIS returns and protect you if HMRC asks questions later.

From experience, HMRC queries are far easier to deal with when records are clean and complete.

Common mistakes I see with labour-only subcontractors

There are several recurring problems.

Contractors fail to verify subcontractors, apply deductions incorrectly, forget to issue statements, or miss monthly returns because payments feel informal.

Another common issue is treating labour-only subcontractors as employees in practice while running them through CIS, which can trigger employment status challenges.

These issues tend to build slowly and then surface all at once.

Managing relationships with labour-only subcontractors

Clear communication matters.

Labour-only subcontractors should understand how CIS works, why deductions are made, and what paperwork they will receive. This reduces disputes and builds trust.

When people understand that CIS deductions are tax paid on account rather than money lost, conversations become much easier.

Using software to manage CIS payments

Many accounting and payroll systems include CIS functionality.

When set up correctly they can automate verification, calculation, statement generation, and monthly returns. When set up poorly they can create repeated errors.

I always advise reviewing CIS settings carefully and not assuming default options are correct for labour-only arrangements.

What happens if you get it wrong

Mistakes with labour-only CIS payments can have serious consequences.

Penalties for late returns, interest on unpaid deductions, and compliance checks are all possible. In more serious cases HMRC may question employment status or open wider reviews.

Most of these outcomes are avoidable with a simple but disciplined process.

How I advise clients to handle labour-only CIS payments

When I help clients with labour-only subcontractors my focus is on structure.

We confirm status, register correctly, set up verification and payment systems, and create a routine for monthly returns and payments. Once that structure is in place the day to day handling becomes straightforward.

The goal is to remove uncertainty rather than react to problems later.

Final thoughts

Handling CIS payments for labour-only subcontractors does not need to be complicated, but it does need to be deliberate.

Because every payment is labour, there is no margin for error in the calculation, and because working arrangements can look similar to employment, scrutiny can be higher.

From my experience the businesses that manage this well are not the biggest or most sophisticated, they are the ones that apply the rules consistently, keep good records, and treat CIS deductions with the respect they deserve.

Get the process right early and labour-only CIS payments become just another routine part of running a construction business rather than a constant source of worry.

You may also find our guidance on How does VAT interact with CIS payments and How do I verify a subcontractor under CIS helpful when dealing with related CIS questions. For a broader overview of CIS rules, compliance, and support, you can visit our cis guidance hub.