How Does CIS Work for Limited Companies

Introduction

The Construction Industry Scheme (CIS) applies to all businesses involved in construction work in the UK, including limited companies. Under the scheme, contractors must deduct tax from payments made to subcontractors and report those deductions to HMRC each month.

Whether your company acts as a contractor, subcontractor, or both, CIS affects how you are paid, how you manage tax deductions, and how you file your returns.

When CIS applies to limited companies

Your limited company must register for CIS if it:

Pays other businesses or individuals to do construction work (acting as a contractor).

Carries out construction work for another business and receives payment for it (acting as a subcontractor).

Some companies are both contractors and subcontractors, meaning they must register in both roles.

Example

ABC Construction Ltd builds new homes for a property developer and hires electricians and plumbers as subcontractors. Because it both receives payments and pays others for construction work, ABC Construction Ltd must register as both a contractor and a subcontractor under CIS.

How CIS works for subcontractors

When your limited company works as a subcontractor, contractors deduct tax from your payments before you are paid. These deductions are made at one of three rates depending on your registration status with HMRC:

20 percent if your company is registered as a subcontractor.

30 percent if your company is not registered.

0 percent (gross payment status) if your company is approved to receive full payments without deductions.

The deducted tax is paid directly to HMRC and treated as an advance payment toward your company’s tax bill.

Example

XYZ Construction Ltd is registered as a CIS subcontractor. It completes work worth £10,000 for a contractor. The contractor deducts 20 percent (£2,000) and pays XYZ Construction Ltd £8,000. HMRC records the £2,000 deduction as a payment on account for XYZ Construction Ltd’s Corporation Tax or PAYE liabilities.

Gross payment status for limited companies

If your company has a good compliance record, you can apply for gross payment status, which allows contractors to pay you in full without making CIS deductions.

To qualify, your company must:

Have paid all tax and National Insurance on time.

Have a business bank account.

Prove that construction work is your main business activity.

Meet HMRC’s turnover test (usually £30,000 per director or £100,000 for the whole company).

With gross payment status, your company remains responsible for paying all tax directly to HMRC through its Corporation Tax return or PAYE system.

This status improves cash flow, as it avoids waiting for refunds of overpaid CIS deductions.

How CIS works for contractors

If your limited company acts as a contractor, you must deduct CIS tax from payments made to subcontractors and send the deductions to HMRC each month.

Contractor responsibilities include:

Registering with HMRC as a contractor under CIS.

Verifying each subcontractor’s CIS status before making payments.

Deducting 20 percent, 30 percent, or 0 percent (for gross payment status) from subcontractor payments.

Providing each subcontractor with a CIS payment and deduction statement every month.

Submitting a monthly CIS return to HMRC by the 19th of each month.

Paying the deducted tax to HMRC by the same deadline.

Failure to verify subcontractors or file CIS returns on time can result in penalties.

Example

BuildRight Ltd hires several subcontractors. It verifies each one’s CIS status using HMRC’s online portal. One subcontractor is registered and has 20 percent deductions, another has gross payment status, and one is unregistered with 30 percent deductions. BuildRight Ltd records all payments, provides statements, and files its CIS return by the 19th of the following month.

CIS and VAT for limited companies

If your limited company is VAT registered, CIS affects only the labour portion of your invoices, not the VAT. When you issue or receive an invoice under CIS:

The contractor deducts CIS tax from the labour charge only.

VAT is charged and paid in full, as usual.

Under the domestic reverse charge for VAT, contractors may also have to account for VAT themselves on certain construction services. A CIS accountant can help ensure your company applies the correct VAT treatment to avoid errors.

Filing CIS returns for your company

If your company is a contractor, you must file CIS returns each month. Each return should include:

The details of all subcontractors paid that month.

The total amount paid to each subcontractor.

The amount of tax deducted and paid to HMRC.

Returns must be submitted by the 19th of the following month, and late filing triggers automatic penalties starting at £100.

If no subcontractors were paid during the month, you must still file a nil return to stay compliant.

CIS record keeping requirements

HMRC requires companies registered under CIS to keep detailed records for at least three years, including:

Subcontractor verification details and UTRs.

Payment and deduction statements.

Copies of monthly CIS returns.

Invoices and receipts.

Keeping accurate records protects your company in case of an HMRC enquiry and ensures you can claim any tax credits or refunds due.

Claiming CIS tax deductions as a limited company

As a subcontractor, your limited company can offset CIS deductions against other tax liabilities, such as PAYE or Corporation Tax.

If your CIS deductions exceed your total tax liability, you can apply to HMRC for a refund through your company’s PAYE account. Refunds are typically issued within six to twelve weeks once HMRC confirms all records are correct.

Example

ConstructCo Ltd has £10,000 in CIS deductions and a total Corporation Tax bill of £8,500. HMRC offsets £8,500 of the deductions against the tax owed and refunds the remaining £1,500.

How an accountant can help your company manage CIS

CIS compliance can be time consuming, especially for companies acting as both contractors and subcontractors. A CIS accountant can help by:

Registering your company for CIS and managing monthly returns.

Verifying subcontractors and calculating deductions correctly.

Claiming overpaid CIS tax quickly and accurately.

Applying for gross payment status.

Ensuring correct VAT and PAYE integration.

Professional support reduces the risk of errors, missed deadlines, and HMRC penalties while keeping your company’s finances organised.

Common CIS mistakes to avoid

Forgetting to verify subcontractors before payment.

Missing monthly filing deadlines.

Miscalculating deductions or applying the wrong rate.

Not keeping accurate CIS records.

Confusing VAT with CIS deductions.

A proactive accountant ensures these issues are avoided, saving your company time and money.

Example scenario

Precision Builders Ltd operates as both a contractor and subcontractor. Its accountant registers the company for CIS, verifies subcontractors monthly, and files returns on time. The accountant also offsets £5,000 of CIS deductions against the company’s Corporation Tax bill and helps apply for gross payment status. This improves cash flow and ensures full compliance with HMRC.

Conclusion

CIS applies to most limited companies working in the construction industry. Contractors must deduct and report tax from payments to subcontractors, while subcontractors can reclaim overpaid tax through their returns or PAYE account.

Staying compliant requires accurate record keeping, timely filings, and a clear understanding of CIS rules. A qualified accountant can manage the process for you, reduce tax inefficiencies, and ensure your limited company meets all HMRC obligations smoothly and on time.