CIS Tax Deduction for Limited Companies

The Construction Industry Scheme (CIS) is a key component of the UK’s tax system, designed specifically for the construction sector. It governs how payments from contractors to subcontractors are handled, with tax deductions taken at source and sent directly to HM Revenue & Customs (HMRC). While sole traders are often the most discussed group under CIS, limited companies operating as subcontractors also fall within its scope—and navigating the nuances can be complex without expert support.

For limited companies working in construction, CIS affects how they receive payments, how much tax is deducted, and how these deductions are reported and reclaimed. Misunderstanding the rules can result in significant cash flow issues, missed tax reliefs, or penalties from HMRC. This is why professional accountancy services like those offered by LT Accounting are invaluable in ensuring your company stays compliant while optimising your tax position.

In this article, we’ll explain how CIS works for limited companies, what responsibilities contractors and subcontractors hold, and how deductions are processed and reclaimed. We’ll also cover common mistakes and how LT Accounting helps streamline your CIS compliance so you can focus on running your business.

Understanding CIS for Limited Companies

The Construction Industry Scheme applies to both contractors and subcontractors involved in construction-related activities in the UK. While it’s easy to assume CIS is only relevant for self-employed individuals, limited companies—especially those acting as subcontractors—are directly affected by CIS rules.

Who Is Affected by CIS?

Under CIS, a business or individual is considered a contractor if they pay subcontractors to carry out construction work. On the other hand, a subcontractor is someone who is paid to do construction work. Limited companies often act as subcontractors and are therefore subject to CIS deductions when working for contractors.

Examples of work covered under CIS include:

• Site preparation

• Demolition and dismantling

• Building work

• Alterations, repairs, and decorating

• Installation of systems for heating, lighting, power, water, and ventilation

If your limited company provides these services, you’re likely operating under CIS.

Registration Requirements

Limited companies must register as subcontractors with HMRC under the CIS scheme. This registration ensures that contractors deduct tax at the correct rate—20% for registered subcontractors and 30% for those who haven’t registered.

If your limited company also hires subcontractors, you must register as a contractor too. This dual role is common in the construction industry and brings additional responsibilities, including verifying subcontractors and submitting monthly CIS returns.

Contractor vs Subcontractor Obligations

• Contractors must:

  • Verify each subcontractor with HMRC

  • Deduct the appropriate amount of CIS tax from payments

  • Submit monthly CIS returns

  • Provide subcontractors with monthly payment and deduction statements

  • Pay CIS deductions to HMRC

• Subcontractors (including limited companies) must:

  • Ensure they are properly registered with HMRC

  • Keep records of payments and deductions

  • Claim tax deductions at year-end or offset them against other liabilities

Failing to fulfil these roles can result in penalties, interest charges, and cash flow problems. Hence, accurate bookkeeping and timely submissions are critical.

Why It Matters for Limited Companies

CIS deductions reduce the net payment your company receives for completed work. This can lead to a squeeze on working capital unless deductions are carefully managed and reclaimed. Fortunately, limited companies can offset these deductions against Corporation Tax, PAYE liabilities, or claim refunds if overpayments occur—topics we’ll cover in detail in the next sections.

With many moving parts, managing CIS efficiently requires a robust understanding of HMRC guidelines, meticulous record-keeping, and seamless coordination with your accounting systems. At LT Accounting, we provide dedicated CIS support to help limited companies navigate these complexities, stay compliant, and keep their finances healthy.

How CIS Tax Deductions Work for Limited Companies

When a limited company is operating as a subcontractor under the Construction Industry Scheme (CIS), the way it gets paid is significantly affected. Instead of receiving the full invoice amount from a contractor, a portion of the payment—specifically, a tax deduction—is withheld and paid directly to HMRC. This is essentially an advance payment toward the company’s overall tax liabilities.

Understanding how this process works is essential for cash flow management, tax planning, and CIS compliance. Here’s a breakdown of what you need to know.

CIS Deduction Rates Explained

There are three key CIS tax deduction scenarios that a limited company subcontractor might fall into:

1. Standard Deduction Rate – 20%
   This is the most common rate applied to registered subcontractors. If your limited company is correctly registered under CIS, contractors will deduct 20% of the labour element of your invoice.

2. Higher Deduction Rate – 30%
   If your company is not registered for CIS, contractors are required to deduct 30% from your payments. This is a punitive rate designed to encourage proper registration and compliance with HMRC.

3. Gross Payment Status – 0%
   Companies with Gross Payment Status (GPS) receive full payment with no deductions at source. Instead, you pay all tax liabilities at the end of the accounting period. We’ll go into more detail about this next.

What Is Gross Payment Status (GPS)?

Gross Payment Status allows subcontractors to receive payments in full without any CIS deductions. This status is beneficial because it improves cash flow and avoids the need to reclaim overpaid tax.

To qualify, your limited company must:

• Prove it has complied with all tax obligations (PAYE, Corporation Tax, VAT)

• Demonstrate a minimum annual turnover (excluding materials) of at least £30,000 per director or £100,000 per partnership/company

• Show that it maintains accurate records and operates a compliant business

HMRC reviews applications and grants GPS at their discretion. If approved, they’ll notify contractors not to make deductions. This is where an experienced accountant becomes crucial—LT Accounting can help prepare and submit GPS applications on your behalf, ensuring all documentation meets HMRC’s standards.

Invoice Breakdown and Deduction Calculation

To illustrate how deductions work in practice, let’s look at a simplified example.

Example:

A limited company sends the following invoice:

• Labour: £2,000

• Materials: £500

• Total Invoice: £2,500

If registered under CIS, the contractor calculates 20% of labour only:

• 20% of £2,000 = £400

• Payment made to subcontractor: £2,100 (£2,500 – £400)

The contractor then pays the £400 directly to HMRC on behalf of the subcontractor. Importantly, materials must be clearly itemised on invoices to avoid deductions on those amounts.

Contractor Responsibilities When Making Deductions

Contractors working with limited company subcontractors must:

• Verify the subcontractor’s CIS status with HMRC

• Deduct the appropriate rate (20% or 30%)

• Submit monthly CIS returns to HMRC

• Provide monthly payment and deduction statements to the subcontractor

• Remit deductions to HMRC by the 19th of the following month

Non-compliance can result in penalties, interest charges, and reputational damage. Contractors should work closely with their accountants to manage these responsibilities effectively.

Impact on Subcontractor Cash Flow

For limited companies, receiving payments net of 20% deductions can significantly impact cash flow, especially if margins are tight or payment terms are delayed. Therefore, it’s vital to:

• Keep accurate records of all CIS deductions

• Plan for year-end tax reconciliation

• Consider applying for Gross Payment Status if eligible

LT Accounting offers bespoke bookkeeping and management accounting services that integrate seamlessly with CIS tracking, allowing you to stay on top of deductions and maintain healthy cash flow throughout the year.

Claiming Back CIS Deductions as a Limited Company

When your limited company works as a subcontractor under the Construction Industry Scheme (CIS), contractors deduct tax at source from your payments and pass it to HMRC. While this can feel like lost income at first glance, it’s important to understand that these deductions are not an additional tax—they are advance payments towards your company’s Corporation Tax and other liabilities.

Claiming back these deductions or applying them to your tax bills is an essential part of the year-end financial process for many construction businesses. Here’s how it works in practice and how to ensure your company gets back every penny it’s owed.

How CIS Deductions Are Treated by HMRC

CIS deductions made from your invoices are recorded by HMRC against your company’s tax record. Throughout the year, these deductions accumulate on your account and can be used in one of two ways:

1. Offset Against Corporation Tax Liabilities

2. Offset or Reclaimed Against PAYE Liabilities (if your company has employees)

If the deductions exceed your tax liabilities, your company may be entitled to a refund from HMRC. This is especially common for small limited companies or those operating with tight profit margins and few other liabilities.

Using CIS Deductions to Offset Corporation Tax

When you submit your annual Corporation Tax return (CT600), the CIS deductions your company has suffered can be deducted from the overall tax bill. Here’s how:

• Total Corporation Tax liability is calculated based on profit.

• CIS deductions from the year are reported on the return.

• The deductions reduce the balance owed to HMRC.

• If your CIS deductions exceed the tax bill, the surplus may be refunded or carried forward.

Example:

• Corporation Tax due: £5,000

• CIS deductions suffered: £6,000

• Net position: £1,000 refund from HMRC

This process is managed through the company’s online Corporation Tax return, and it’s vital that the figures reported match exactly with HMRC’s own CIS deduction records. Errors or mismatches can delay refunds significantly.

Offsetting Against PAYE Liabilities

If your limited company has employees, you will also be submitting monthly PAYE and NIC payments to HMRC. CIS deductions can be offset against these liabilities as well.

This is done via EPS (Employer Payment Summary) submissions through your payroll software, typically on a monthly basis. The process is as follows:

1. CIS suffered amounts are recorded in payroll records.

2. On the EPS, you declare the total CIS tax your company has suffered.

3. HMRC offsets this amount against your PAYE/NIC bill.

4. If more tax has been deducted than is owed, a refund or credit is issued.

Using CIS offsets in this way helps to reduce your monthly cash outflows, freeing up cash for operational use.

Claiming a Refund from HMRC

If you have no Corporation Tax or PAYE liabilities to offset, or if your CIS deductions exceed what is owed, you can claim a direct refund from HMRC. This typically happens at the end of the tax year (5 April), and the process is as follows:

• Submit a final EPS for the year showing CIS deductions suffered.

• Ensure all payroll and accounting records are up to date and reconciled.

• Contact HMRC (or have your accountant do so) to request a refund.

• Refunds are usually processed by July, although delays can occur.

HMRC may request supporting evidence such as:

• Monthly CIS statements from contractors

• Company bank statements showing payments

• Full reconciliation of invoices and payments

This is where working with a professional accountant such as LT Accounting makes a real difference. We ensure all documentation is properly prepared and submitted, speeding up your refund and reducing the risk of queries or audits.

Common Issues When Reclaiming CIS Deductions

Unfortunately, reclaiming CIS deductions isn’t always smooth sailing. Some common problems include:

• Mismatched records between contractors and HMRC

• Incorrectly completed EPS or CT600 forms

• Failure to separate materials from labour on invoices

• Late or missing CIS monthly returns

Each of these can result in delays, under-refunding, or disputes with HMRC. That’s why our clients rely on LT Accounting to manage this entire process—from monthly CIS reporting to annual Corporation Tax returns—ensuring they never miss a deduction and always recover what they’re owed.

Planning Ahead: How to Maximise Reclaim Potential

To avoid cash flow issues and maximise your reclaim potential:

• Keep accurate CIS records throughout the year

• Submit monthly CIS returns and EPS forms on time

• Work with your accountant to forecast tax liabilities vs. CIS deductions

• Consider applying for Gross Payment Status to eliminate deductions entirely

Our team at LT Accounting offers monthly bookkeeping, payroll, and CIS compliance services to make this entire process painless and profitable for your company.

Record-Keeping and Compliance Essentials

One of the most critical—yet often overlooked—areas of CIS compliance for limited companies is accurate record-keeping. Whether you’re a contractor making deductions or a subcontractor having tax withheld from your payments, HMRC places strict requirements on what must be recorded, how long it should be retained, and how it must be reported.

Poor record-keeping doesn’t just risk financial penalties; it can also result in delayed tax reclaims, HMRC investigations, and unnecessary stress during year-end reporting. Let’s walk through the CIS compliance essentials your limited company needs to stay on top of.

Key CIS Records for Subcontractors

If your limited company is working as a subcontractor, it must maintain detailed and organised records of:

• All invoices submitted to contractors, with clear separation of labour and materials

• Payment and deduction statements received from contractors

• Total CIS tax deducted for each month and cumulatively for the year

• Copies of verification details, showing your CIS status (e.g., 20%, 30%, or Gross)

• Any correspondence with HMRC relating to CIS status or deductions

These records are vital for:

• Completing the CT600 Corporation Tax return

• Submitting accurate EPS forms (if offsetting CIS deductions against PAYE)

• Applying for refunds or addressing disputes with HMRC

At LT Accounting, we help clients maintain clear digital records using cloud accounting software, making year-end processes much smoother.

Monthly CIS Returns for Contractors

If your limited company also acts as a contractor, employing subcontractors for construction work, your responsibilities increase. Every month, you must:

1. Verify each subcontractor with HMRC to confirm their tax status (standard, higher, or gross).

2. Deduct the correct CIS tax from each subcontractor’s payment (if applicable).

3. Submit a CIS300 Monthly Return to HMRC by the 19th of the following month.

4. Provide a deduction statement to each subcontractor, detailing:

   • The gross payment amount

   • Materials (if applicable)

   • Amount deducted

   • CIS tax rate applied

5. Pay HMRC the deducted amounts by the due date.

Failure to submit returns or pay CIS tax on time can result in automatic penalties:

If HMRC suspects deliberate concealment, penalties can be much higher.

Maintaining CIS Deduction Statements

Each payment you receive (as a subcontractor) or make (as a contractor) under CIS must be supported by a deduction statement. For subcontractors, these are critical when:

• Offsetting deductions against Corporation Tax or PAYE

• Proving tax already paid if audited

• Reconciling your accounts at year-end

Ensure every contractor you work with provides these statements monthly and that they’re stored securely (physically or digitally) for at least six years as required by HMRC.

Bookkeeping and CIS Integration

Efficient bookkeeping is the backbone of CIS compliance. Whether your company manages just a few subcontractors or operates on large construction sites, it’s vital to integrate CIS with your bookkeeping systems.

Cloud accounting platforms like QuickBooks, Xero, or FreeAgent can track:

• Payments to and from subcontractors

• CIS suffered and deducted

• Payroll data (for EPS submissions)

• Corporation Tax liabilities

At LT Accounting, we offer integrated bookkeeping and CIS tracking so our clients always know their tax position and can easily reclaim what they’re owed.

Payroll and CIS: Working Hand-in-Hand

If your limited company has employees, your payroll system must align with CIS deductions. Monthly Employer Payment Summary (EPS) submissions are used to report:

• CIS deductions suffered (as a subcontractor)

• Statutory payments or adjustments

• Reductions in your PAYE liability

Accurate EPS submissions ensure you don’t overpay PAYE/NIC and that your CIS deductions are correctly offset.

The Role of Your Accountant in Compliance

Partnering with a proactive accountant is the easiest way to avoid compliance headaches. At LT Accounting, we:

• Prepare and submit monthly CIS returns on behalf of contractor clients

• Ensure all subcontractor verification is correctly processed

• Maintain detailed CIS deduction records

• Submit EPS forms and claim offsets against PAYE

• Complete Corporation Tax returns with CIS adjustments

Our service ensures your limited company avoids penalties, claims all due tax relief, and stays HMRC-compliant year-round.

Common CIS Mistakes and How to Avoid Them

While the Construction Industry Scheme (CIS) is designed to improve tax compliance within the construction sector, it’s also one of the most misunderstood areas of UK tax. Limited companies—whether operating as contractors or subcontractors—can easily make mistakes that lead to penalties, cash flow issues, and HMRC investigations.

Understanding the most common CIS pitfalls and knowing how to avoid them can save your company time, money, and stress. Below, we’ve outlined the top errors seen in practice and how LT Accounting helps our clients navigate around them.

1. Misclassifying Workers (Employee vs Subcontractor)

One of the most frequent errors under CIS is treating someone as a subcontractor when they should be classed as an employee. This has serious implications, including:

• Underpayment of PAYE and National Insurance

• Non-compliance with employment rights (e.g., holiday pay, pension)

• Risk of a status investigation by HMRC

How to Avoid It:

Ensure you carry out a status determination test before engaging new workers. Ask:

• Do they work exclusively for you?

• Do you control their working hours or methods?

• Do they supply their own tools or materials?

If they act like employees, they probably are—and CIS doesn’t apply. At LT Accounting, we help clients carry out status checks and ensure the correct classification for all workers.

2. Failing to Verify Subcontractors with HMRC

Before paying a subcontractor, a contractor must verify their CIS status with HMRC. Skipping this step could result in:

• Applying the wrong deduction rate (e.g., using 20% instead of 30%)

• Inaccurate CIS returns

• Penalties for under-deductions or reporting errors

How to Avoid It:

Use HMRC’s online CIS verification system or have your accountant handle this process. Verification is quick, and once confirmed, the correct rate is applied automatically in future payments.

LT Accounting provides full subcontractor verification as part of our CIS return preparation service, ensuring compliance from day one.

3. Incorrect CIS Deduction Calculations

Another common issue is calculating deductions on the entire invoice amount, including materials and VAT. This is incorrect—CIS should only be applied to the labour portion of the invoice, excluding materials and VAT.

Example of a Common Error:

• Total invoice: £3,000 (£2,000 labour + £1,000 materials)

• Incorrect deduction: 20% of £3,000 = £600

• Correct deduction: 20% of £2,000 = £400

How to Avoid It:

Always itemise labour and materials separately on invoices. This makes it easy for contractors to deduct the correct amount and reduces the risk of disputes. If you’re the contractor, ensure you cross-check before processing payments.

4. Late or Missing CIS Returns

Contractors are legally required to submit monthly CIS returns to HMRC. Failing to submit on time—even if no payments were made—results in automatic penalties, starting at £100 and increasing over time.

How to Avoid It:

Set up a monthly reminder system or use an accountant who will take care of submissions on your behalf. At LT Accounting, we ensure returns are submitted on time, every time, and we handle nil returns when necessary to avoid penalties.

5. Not Keeping Proper CIS Records

Whether you’re a contractor or subcontractor, failing to retain CIS documentation can delay tax reclaims and cause issues during HMRC audits. You need to keep:

• Deduction statements

• Contractor verification results

• Monthly CIS returns

• Invoices and payment records

How to Avoid It:

Implement a cloud-based accounting system or use a bookkeeping service that integrates CIS tracking. LT Accounting provides seamless bookkeeping and digital record-keeping, ensuring everything is ready for audits or reclaims.

6. Forgetting to Reclaim CIS Deductions

Many limited companies leave money on the table by failing to reclaim CIS deductions suffered throughout the year. This is often due to disorganised records or lack of awareness.

How to Avoid It:

Work with an accountant who tracks deductions monthly and ensures they are:

• Offset against Corporation Tax or PAYE

• Refunded via HMRC when appropriate

• Properly reported in the CT600 and EPS

LT Accounting includes CIS reconciliation in our year-end accounts and self-assessment services, so our clients never miss a refund.

7. Delays in Applying for Gross Payment Status

Gross Payment Status (GPS) allows subcontractors to receive full payment with no deductions. However, many companies delay applying or assume they don’t qualify, missing out on the cash flow benefits.

How to Avoid It:

Talk to your accountant early. If your company meets the compliance and turnover thresholds, applying for GPS can significantly boost your working capital. We handle the application process for our clients and advise on maintaining eligibility.

How LT Accounting Helps You Stay CIS-Compliant

Our tailored services are designed to eliminate the stress of CIS for limited companies. We provide:

• Monthly CIS return submission

• Subcontractor verification

• Bookkeeping and payroll integration

• Accurate CIS deduction tracking

• Corporation Tax returns with CIS reconciliation

• Gross Payment Status applications and advice

By managing every part of the CIS process, we ensure our clients stay compliant, avoid penalties, and reclaim every pound they’re owed.

How LT Accounting Supports Limited Companies with CIS

CIS can be complex and time-consuming, especially for growing limited companies that want to focus on projects rather than paperwork. At LT Accounting, we provide specialist CIS support tailored to the needs of UK-based construction companies. Whether you’re a subcontractor, contractor, or both, our services are designed to save you time, reduce stress, and keep your business fully compliant with HMRC regulations.

Below, we break down how our team supports you through every stage of the CIS process—from verification to reclaiming deductions.

1. CIS Return Preparation and Submission

For contractors, submitting monthly CIS300 returns is not optional. It’s a legal requirement that must be completed by the 19th of each month, whether or not any subcontractor payments were made.

LT Accounting ensures:

• All subcontractors are correctly verified with HMRC

• Accurate CIS deductions are calculated on each payment

• Monthly CIS returns are submitted on time

• Nil returns are filed when no payments are made (to avoid automatic fines)

• Payment and deduction statements are issued to each subcontractor

This end-to-end service protects you from late filing penalties, deduction errors, and HMRC audits, while freeing up your time to manage projects.

2. Payroll and Bookkeeping Integration

One of the biggest efficiency wins comes from integrating CIS with your payroll and bookkeeping systems. Our team ensures your accounting software (like Xero, QuickBooks, or Sage) is set up to:

• Track CIS deductions suffered and made

• Record materials and labour correctly on invoices

• Generate EPS submissions for PAYE offsets

• Match bank transactions to contractor or subcontractor payments

We also maintain up-to-date books, making it easier to:

• Monitor cash flow

• Prepare for tax reclaims

• Generate real-time reports

With accurate and accessible financial records, your business is always audit-ready and able to reclaim tax quickly and confidently.

3. Year-End Accounts and Corporation Tax with CIS Adjustments

When it comes to filing your company’s year-end accounts and Corporation Tax return (CT600), it’s essential that your CIS deductions are accurately reflected. Many businesses either forget to claim or submit incorrect figures, leading to lost tax relief.

LT Accounting ensures:

• CIS deductions are fully reconciled against contractor statements

• Claims are made correctly in your CT600

• Overpaid tax is either refunded or carried forward

• Year-end accounts align with HMRC records to avoid queries

This is particularly important for limited companies that suffer significant deductions throughout the year or rely on refunds to maintain cash flow.

4. Gross Payment Status Applications and Management

We also help subcontractors apply for Gross Payment Status (GPS), which allows them to receive payments without any CIS tax deductions. If your company meets the criteria, we’ll:

• Advise on eligibility and turnover thresholds

• Submit a full application to HMRC on your behalf

• Prepare the required documentation and tax compliance history

• Provide ongoing support to maintain GPS eligibility

GPS can provide a significant cash flow advantage, especially for companies working on large contracts or managing multiple jobs simultaneously.

5. Dedicated CIS Advice and HMRC Liaison

When issues arise—whether it’s a CIS refund delay, an HMRC query, or uncertainty about how to classify a worker—our team is here to help. We provide:

• One-to-one advice from experienced CIS specialists

• Direct liaison with HMRC to resolve disputes or queries

• Help with reclaiming overpaid deductions

• Ongoing support for your CIS, VAT, payroll, and tax obligations

Our proactive approach means we often solve issues before you even know they exist—keeping your business compliant and your accounts accurate.

Benefits of Partnering with LT Accounting

By outsourcing your CIS responsibilities to LT Accounting, you gain:

✅ Fewer errors and HMRC penalties
✅ Faster tax refunds and accurate reclaims
✅ Integrated payroll and bookkeeping support
✅ Real-time visibility into your CIS position
✅ Peace of mind with ongoing compliance

Whether you’re a small company just entering CIS or a well-established contractor managing dozens of subcontractors, our bespoke accounting services are scaled to fit your needs.

Conclusion: Take Control of CIS with Expert Support

Understanding how CIS tax deductions work for limited companies is essential for any business operating within the UK construction industry. Whether you’re a subcontractor dealing with 20% deductions on every invoice or a contractor juggling monthly CIS returns, one thing is clear: compliance isn’t optional—and mistakes can be costly.

From registration and verification to deduction management, bookkeeping, and reclaiming tax, the CIS system involves many moving parts. Without the right support, it’s all too easy to:

• Lose out on rightful tax refunds

• Get penalised for late or incorrect submissions

• Face unnecessary cash flow struggles

• Spend hours trying to untangle accounting errors

That’s where LT Accounting comes in.

Your CIS Compliance Partner

As a specialist accountancy firm working closely with UK construction companies, we provide end-to-end CIS support tailored to limited companies. We don’t just file returns—we help you:

• Maximise your cash flow

• Maintain flawless compliance

• Reclaim every pound you’re owed

• Apply for and maintain Gross Payment Status

• Align your CIS with payroll, VAT, and year-end accounting

Whether you’re just setting up or scaling your operations, we’re here to make CIS simple and stress-free.

Let’s Get to Work

✅ Want to make sure you’re not overpaying tax under CIS?
✅ Need help submitting accurate CIS returns on time?
✅ Tired of chasing refunds or worrying about HMRC penalties?

Get in touch with LT Accounting today.

We offer free initial consultations, transparent pricing, and bespoke support to fit your construction business—no matter the size or complexity. Our expert team is ready to take CIS off your plate and put your company in the strongest financial position possible.