Why you are on the rate you are on, what comes out of the deduction base and what stays in, and how the money finds its way back to you — which is a different mechanism, and a different timescale, depending on whether you trade personally or through a company.
CIS 340 states there are two rates of deduction: the standard rate of 20% and the higher rate of 30%. Gross payment status means no deduction is made at all. 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.
Find out which of those two applies. A verification failure is a paperwork problem that costs an extra ten percentage points on every deduction, and you can fix it this month.
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.
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 in CIS warns you when this is wrong, so the error can run 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.
A £10,000 labour-only invoice at 20% suffers £2,000 and pays you £8,000. Put £3,000 of your own evidenced materials through the same £10,000 invoice and the deduction is charged on the remaining £7,000 of labour — £1,400. On the same job and total, that is £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.
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.
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 keeps that cash in the business now. Gross payment status removes the problem, because nothing is deducted.
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.
Either you are not registered for CIS, or the contractor could not verify you. A verification failure can be administrative — a name that does not match HMRC's record, a wrong Unique Taxpayer Reference, a company number transposed. Find out which of the two it is. If it is a verification failure the fix is paperwork, and the difference is ten points of your turnover. Ask the contractor for the verification reference on your payment and deduction statement: where verification failed, HMRC issues the batch number with a unique letter suffix, and that suffix is the evidence of what happened.
Out: materials you have directly incurred, consumable stores, fuel other than fuel for travelling, plant hire costs, the cost of manufacture or prefabrication, and the VAT you have charged. Not out: travelling expenses and subsistence, which sit inside the payment subject to deduction. And materials only count if you directly incurred them — if the contractor reimburses you for materials, you have not directly incurred them and no reduction is due. On a £10,000 invoice, £3,000 of evidenced own-bought materials cuts the deduction from £2,000 to £1,400.
If you are a sole trader or in a partnership, the CIS payments and deductions go on the self-employment supplementary pages, or the partnership return — never on the employment pages, because they are not employment income. They are advance payments of income tax and Class 4 National Insurance and are set against your Self Assessment liability, with any excess repaid. If you trade through a company, the company cannot claim them on its corporation tax return at all; it offsets them monthly through the RTI and EPS process.
Then the excess accumulates. A company offsets CIS suffered against PAYE due, National Insurance due, student loan repayments due, and CIS deducted from its own subcontractors — in that order, monthly. A labour-only company with a small payroll does not have enough of those to absorb what it suffers. At the end of the tax year the excess may be refunded or set against corporation tax, but no repayments or set-offs against other liabilities can be made in-year except where the company is in liquidation or administration. Gross payment status is the fix.
Three months of returns and statements, a straight account of what is wrong and what it is costing, and a number on the gross payment status question.