Two rates, and a status that is not a rate
CIS 340 states there are two rates of deduction: the standard rate of 20% and the higher rate
of 30%. Gross payment status is not a third rate — it is the absence of a deduction. You are on
20% if you are registered and the contractor verified you, and on 30% if you are not registered
or could not be verified.
It is worth finding out which of those two applies, because a verification failure is a
paperwork problem with a ten-point price tag, and it is fixable this month rather than next
year.
The deduction base — the part worth getting right
Deductions must only be made from the part of the payment that does not represent the cost of
materials you have directly incurred. Alongside materials, these come out of the base:
consumable stores; fuel, except fuel for travelling; plant hire costs; the cost of manufacture
or prefabrication; and the VAT you have charged.
The expensive one
Travelling expenses and subsistence stay in. A line on your invoice for
mileage, or for a night away from home, has the deduction taken off it in full. Nothing
bounces when this is wrong, which is exactly why it runs for years.
The other half of it is who bought the materials. You must have directly incurred the
cost. Where the contractor reimburses you for materials, you have not directly incurred them and
no reduction is due — so the same £3,000 of materials either reduces your deduction or does
nothing at all, depending purely on whose account they went on.
Illustrative — the arithmetic holds
A £10,000 labour-only invoice at 20% suffers £2,000 and pays you £8,000. Put £3,000 of your
own properly evidenced materials through the same £10,000 invoice and the deduction is charged
on the remaining £7,000 of labour — £1,400. Same job, same total, £600 more in the bank now.
If the contractor had bought those materials and recharged them to you, the deduction would
still be £2,000.
How the money comes back — and why it takes so long
Sole trader or partnership. CIS payments and deductions go on the
self-employment pages or the partnership return. CIS 340 is emphatic that they must never go on
the employment pages, because they are not employment income. They are advance payments of
income tax and Class 4 National Insurance, set against the Self Assessment liability, with any
excess repaid. The structural problem is timing: deductions are suffered continuously through
the year, and recovery happens after the year ends and the return is filed.
Company. The company cannot claim CIS deductions on its corporation tax
return. It offsets them in-year, monthly, through the RTI and EPS process, against PAYE due,
National Insurance due, student loan repayments due, and the CIS it has deducted from its own
subcontractors. Any excess that cannot be set off may be refunded or set against corporation tax
at the end of the tax year — but no repayments or set-offs against other liabilities can be made
in-year, except where the company is in liquidation or administration.
Which gives the position worth stating plainly: a labour-only limited company with a small
payroll will systematically accumulate more CIS suffered than it has PAYE to absorb, and that
money is locked up until after 5 April. Running a real payroll and claiming the offset every
month is cash kept now rather than a refund claimed later — and gross payment status removes the
problem rather than managing it.
And never treat the deduction as a cost
CIS suffered is a tax asset. If it is not appearing as one on your balance sheet, the CIS
records and the payment and deduction statements are the first thing to reconcile — and bank
receipts are not a substitute for the statements, because the statements are the evidence of
what was deducted and why.
