How MTD IT works for CIS subcontractors
30-second answer
If you're a subcontractor in the Construction Industry Scheme (CIS), contractors deduct tax from your payments before you receive them.
Under Making Tax Digital for Income Tax, you should record your income gross. That's the full amount you invoiced, before any CIS deductions were taken off.
Your CIS deductions aren't ignored, they're simply dealt with at the end of the tax year. When you complete your end of year tax return, the deductions you've already had taken are set against your final tax bill, so you only pay what's left (or receive a refund if you've overpaid).
This guide is most relevant if you are:
- A subcontractor registered under the Construction Industry Scheme
- Required to comply with Making Tax Digital for Income Tax
- Unsure whether to record your income before or after CIS deductions
This guide covers
This guide is provided for general information only and is based on HMRC guidance available at the time of writing.
Under the Construction Industry Scheme, contractors deduct money from a subcontractor's payments and pass it to HMRC. HMRC says these deductions count as advance payments towards the subcontractor's tax and National Insurance.
For Making Tax Digital, HMRC requires you to report your business income in your quarterly updates. This is the income you've earned, not the amount that landed in your bank account after deductions.
The deductions themselves are then taken into account at the end of the tax year, when you complete your end of year tax return and HMRC calculates your final tax position.
The Construction Industry Scheme (CIS) is HMRC's way of collecting tax from construction work as it happens, rather than waiting until the end of the year.
When a contractor pays a subcontractor, they deduct a percentage from the labour part of the payment and send it directly to HMRC:
- 20% if you're registered for CIS
- 30% if you're not registered
- 0% if you have gross payment status
Each month, the contractor should give you a payment and deduction statement showing what you were paid and what was deducted. Keep these safe. They're your record of the tax you've already paid.
Record your income gross. That means the full amount you invoiced, before the CIS deduction was taken off.
Here's an example:
You invoice a contractor £1,000 for labour. You're registered for CIS, so the contractor deducts 20% (£200) and pays £800 into your bank account.
In your spreadsheet, you record £1,000 of income. Not £800.
It can feel strange recording more than you received, but the £200 hasn't disappeared. The contractor has paid it to HMRC on your behalf, and it will be set against your tax bill at the end of the year.
In short
Think of each CIS deduction as a payment into a tax pot with your name on it.
Your quarterly updates tell HMRC what you've earned. Your tax pot sits quietly to one side. At the end of the year, HMRC works out your tax bill, then empties the pot into it. Whatever's left is what you pay, and if the pot held more than the bill, you get the difference back.
CIS deductions aren't a business expense and they're not a discount on your income. They're your own tax, paid early.
If you recorded your income net (the £800 in our example), two things would go wrong:
- Your quarterly updates would understate your income, so your records wouldn't match what you actually earned
- Your deductions would effectively vanish, meaning they wouldn't be set against your tax bill at year end
Recording gross keeps your income accurate and your deductions ready to be claimed where they belong, at the end of the year.
CIS deductions only apply to the labour part of a payment. If you charge a contractor for materials, the contractor should exclude the cost of those materials before calculating the deduction.
For example, if you invoice £1,500 made up of £1,000 labour and £500 materials, the 20% deduction applies only to the £1,000 labour. So £200 is deducted and you receive £1,300.
In your spreadsheet, you'd still record the full £1,500 as income, and record what you spent on the materials as an expense in the usual way.
Your end of year tax return is where your CIS deductions finally come into play.
Throughout the year, every contractor you work for reports your payments and deductions to HMRC on their monthly CIS returns. By the end of the tax year, HMRC should already hold a record of the deductions taken from you.
When you complete your end of year tax return through your MTD-compatible software, you'll be able to:
- View the deductions HMRC holds for you, contractor by contractor
- Check them against your own payment and deduction statements
- Add any deductions that are missing
- Correct or remove entries you've added yourself, if needed
HMRC then calculates your tax bill for the year and sets your CIS deductions against it. If your deductions are more than your bill, you'll be due a refund.
For each contractor you've worked for, HMRC's records show:
- The contractor's name and their employer reference
- The gross amount you were paid
- The cost of materials included in those payments
- The amount deducted and paid to HMRC on your behalf
These figures are broken down by CIS tax month, which runs from the 6th of one month to the 5th of the next. That matches the monthly payment and deduction statements contractors give you, so checking HMRC's figures against your own statements should be straightforward.
Each entry also shows who reported it: the contractor, or you.
Contractors are human, and sometimes a deduction is reported late, reported incorrectly or not reported at all. This is exactly why your payment and deduction statements matter.
If a deduction is missing, you'll be able to add it yourself at year end, recording the tax month it relates to, the gross amount you were paid, the cost of any materials and the amount deducted.
If you've made a mistake in an entry you added, you'll be able to change it or remove it.
If a contractor's own figures look wrong, you can't edit those directly. The best first step is to contact the contractor and ask them to correct their CIS return. If that doesn't resolve it, HMRC can help. Your statements are your evidence, so keep them safe.
Your quarterly updates and your CIS deductions are dealt with at different points in the year, and it helps to keep the two jobs separate in your mind.
During the year, your quarterly updates report your income and expenses. Your income goes in gross, and your CIS deductions don't appear anywhere in them.
At the end of the year, your end of year tax return is where your deductions are reviewed, confirmed and set against your tax bill.
So if you're partway through the year wondering where to put your deductions, the answer is: nowhere yet. Keep your statements safe and your income gross, and the deductions will have their moment at year end.
CIS functionality is part of our end of year tax return development, which is currently being built.
Our aim is the same as it is for everything else - making the process straightforward for spreadsheet users. You'll be able to view the deductions HMRC holds for you, check them against your own records and add anything that's missing, all without moving to complicated accounting software.
The feature will be available before customers need to submit their first end of year tax return.
In the meantime, everything you need to do is simple: record your income gross in your spreadsheet and keep hold of your payment and deduction statements.
Before. Record the full amount you invoiced, not the amount you received after the deduction. The deduction is set against your tax bill at the end of the year.
No. Quarterly updates report your income (gross) and expenses. Your CIS deductions are dealt with once, at the end of the tax year, as part of your end of year tax return.
No. They're advance payments of your own tax and National Insurance, so they don't belong in your expenses. Recording them as an expense would mean submitting the wrong figures.
Usually, yes. Contractors report your payments and deductions to HMRC every month. At year end, you'll be able to see what HMRC holds, broken down by contractor and by tax month, and check it against your own statements.
You'll be able to add the missing deduction yourself at year end. This is why keeping your monthly payment and deduction statements is so important - they're your evidence of what was deducted.
No, you can only change or remove entries you've added yourself. If a contractor's figures look wrong, contact the contractor and ask them to correct their CIS return. If that doesn't work, HMRC can help.
You'll be due a refund. Because CIS deductions come off the labour part of your payments before you've claimed any expenses or allowances, it's common for subcontractors to have overpaid by the end of the year.
No. Deductions are only taken from the labour part of a payment. You should still record the full invoice value (labour and materials) as gross income, and record the cost of materials as an expense in the usual way.
Yes. CIS support is part of our end of year tax return functionality, which is currently under development and will be available before customers need to submit their first end of year tax return.
This guide is provided for general information only. suiteSheets is software for spreadsheet users. We do not provide tax advice, accounting advice or legal advice. If you are unsure how the Construction Industry Scheme or Making Tax Digital applies to your circumstances, contact HMRC or a qualified adviser.
These HMRC pages provide further context on the Construction Industry Scheme and how it fits into Making Tax Digital for Income Tax.
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