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If your business is in the construction industry, you are likely familiar with the Construction Industry Scheme (CIS). Under this scheme, contractors must take tax from payments made to subcontractors and send it to HMRC. While this helps ensure taxes are paid throughout the year, it can impact your cash flow, especially if you are a subcontractor working through a limited company. The good news is that you don’t have to consider CIS deductions as a loss. You can use these deductions to reduce your corporation tax or other HMRC payments.
Understanding CIS Deductions
The Construction Industry Scheme is designed to ensure that tax is collected from subcontractors working in construction before payments are made. When a contractor pays your limited company, they may deduct 20% from the labour portion of your invoice and pay this directly to HMRC.
This deduction is not an additional tax; it is effectively a prepayment of your company’s tax liability. Think of it as tax paid in advance. Your company can later use these CIS deductions to offset against your PAYE, National Insurance, or corporation tax bill.
If your company holds Gross Payment Status, you can receive payments in full without deductions. However, most small and medium-sized construction businesses have deductions taken at source, which means it’s crucial to understand how to reclaim or offset them properly.
How CIS Works for Limited Companies
For a limited company subcontractor, CIS deductions are handled differently from those for a self-employed sole trader. As a company, you are responsible for running payroll, submitting PAYE information, and filing a corporation tax return.
When a contractor pays you, the amount deducted under CIS is reported to HMRC under your company’s name. Each deduction is treated as tax already paid on behalf of your company. Throughout the year, you can use these deductions to offset any PAYE or National Insurance liabilities your company owes.
If, after offsetting those amounts, a balance of CIS deductions remains, it can be used to offset your corporation tax bill or claimed back as a refund.
How to Offset CIS Deductions Against Corporation Tax
Step 1: Keep Records of All CIS Deductions
Your first step is to ensure you have a complete record of all CIS deductions incurred throughout the year. Each time a contractor pays your company, they must provide you with a payment and deduction statement showing the gross amount, CIS deducted, and the net payment received.
You should carefully collect and retain these statements, as HMRC will need them as proof when you claim any offsets or refunds. Keeping your bookkeeping software and payroll up to date with these figures will also make the process smoother.
Step 2: Report CIS Deductions in Your Payroll (EPS Submission)
Every month, your company should submit an Employer Payment Summary (EPS) to HMRC as part of your PAYE reporting. Within this EPS, there is a section where you can report the total amount of CIS deductions your company has suffered from contractors during that period.
By doing this, HMRC can use those CIS deductions to reduce your company’s PAYE and National Insurance liabilities. If your company’s CIS deductions are higher than the PAYE/NIC you owe, the extra amount will be carried forward to the next month or quarter.
Step 3: Use Remaining Deductions to Offset Corporation Tax
At the end of your company’s financial year, you will prepare your corporation tax return (CT600). This is where you can offset any remaining CIS deductions that have not already been used against PAYE or NIC.
In simple terms, once your payroll liabilities are cleared, any unused CIS deductions can be applied to reduce your corporation tax bill. If the deductions completely cover your tax liability, you may owe no corporation tax for that period.
If the deductions are higher than your total corporation tax bill, your company can request a refund from HMRC for the excess amount.
Step 4: Making the Claim or Offset
You can claim the offset or refund after submitting all your final EPS and FPS (Full Payment Submission) for the year. Once HMRC has your complete payroll information, they will review your account and either:
- Apply the CIS deductions against your corporation tax liability, reducing or clearing the amount due, or
- Issue a refund for any remaining balance after offsets have been applied.
To expedite the process, ensure that your corporation tax return, payroll submissions, and CIS deduction records all match exactly. Any discrepancies can delay HMRC’s processing time.
Step 5: Keep Documentation Ready
HMRC may request proof before applying any offset or refund. Therefore, it’s essential to maintain all of the following:
- Payment and deduction statements from each contractor
- Payroll submissions showing CIS suffered
- Corporation tax computation
- Bank statements showing corresponding payments received
Keeping accurate, organised records will help ensure your claim is processed quickly and without dispute.
Common Mistakes to Avoid
While the process may seem straightforward, many companies make minor mistakes that can cause delays or result in HMRC rejections. The most common errors include:
- Failing to include CIS deductions in the monthly EPS submissions
- Losing or misplacing contractor deduction statements
- Treating CIS deductions as a business expense instead of a tax credit
- Submitting the corporation tax return without reconciling CIS records
- Missing the final EPS for the year, which prevents HMRC from applying the deduction
Avoiding these mistakes can save time, money, and frustration when claiming CIS offsets or refunds.
Professional Help: Why Work with a Specialist Tax Accountant
The CIS scheme can be complex, especially when you’re managing multiple contractors, subcontractors, and monthly payroll submissions. Even a minor data error can delay refunds or cause compliance issues.
A specialist tax accountant experienced in CIS can:
- Reconcile all your CIS deduction statements
- Prepare accurate PAYE submissions and corporation tax returns
- Identify all available offsets and refunds
- Communicate directly with HMRC to speed up claims
- Help you apply for Gross Payment Status to stop future deductions altogether
Professional help ensures you don’t lose valuable tax credits due to administrative oversights. If your construction business has suffered CIS deductions and you want to know how much you can offset against your corporation tax, contact Tax Accountant UK today. Our CIS specialists can review your deductions, file the correct claims, and help you recover any overpaid tax quickly and compliantly.