Reclaiming CIS deductions,
and the money sitting with HMRC.

A limited company recovers CIS deductions suffered by reporting them on its Employer Payment Summary each month, which offsets them against its PAYE, National Insurance and student loan liabilities. Any excess carries forward within the tax year. Only after the year ends can what is left be set against Corporation Tax or repaid. There is no in-year route to Corporation Tax.

What is being deducted, and from what

When a contractor pays you as a CIS subcontractor, it deducts tax at source and pays it to HMRC on your behalf. Three rates, and which one applies is about your registration rather than your work: 20% where you are registered under CIS, 30% where you are not, and nothing at all where you hold gross payment status.

The deduction comes off the labour element. Materials you have supplied, plant hire in certain circumstances, VAT and other items outside the scheme are excluded from the figure the percentage is applied to. This is worth checking rather than assuming, because a contractor that deducts from the whole invoice instead of the labour element is taking more of your cash than it should, and it happens often enough to be worth a look at your last three payment and deduction statements.

The important framing: this is not a tax on you. It is a payment on account of tax you may or may not eventually owe. On a profitable year it is roughly right. On a year where margins are thin, or where labour is a large share of turnover, the deductions can comfortably exceed the tax due, and the surplus is yours.

Nothing about the deduction is a charge. Every penny of it is either offset against something you owe or repaid. The only question is when, and the answer depends on a submission somebody has to file.

The Employer Payment Summary is the whole answer

Here is the mechanism, and it is the part firms most often miss.

A limited company that suffers CIS deductions and runs a PAYE scheme reports those deductions to HMRC on its Employer Payment Summary, submitted through Real Time Information alongside the payroll. HMRC then offsets the deductions suffered against what the company owes for that period on PAYE, National Insurance, student loan deductions and its own CIS liabilities.

In practice that means the deductions taken off your applications come back as a reduction in the payroll bill you pay over each month, rather than as a cheque. A company suffering £4,000 of deductions in a month against a £5,000 PAYE bill pays HMRC £1,000 that month. The recovery is real, immediate, and invisible unless somebody is looking for it, which is precisely why it goes unnoticed.

If nobody files the EPS with the deductions on it, none of that happens. The money simply sits with HMRC, the payroll bill is paid in full each month, and the position quietly accumulates until somebody looks at it a year later. This is the single most common reason a construction company is carrying a large CIS balance: not a dispute, not a delay at HMRC, just a submission that was never made.

When the deductions exceed the payroll bill

A labour-heavy subcontractor with a small direct payroll will regularly suffer more in deductions than it owes in PAYE. Where that happens, the unused balance carries forward to the following month within the same tax year and offsets against that month's liabilities instead.

So through the year the position accumulates rather than being lost. What it does not do is convert into anything else. It cannot be set against Corporation Tax as you go, and it cannot generally be refunded mid-year on request. It waits.

That waiting is the structural problem for firms whose model is mostly subcontracted labour supplied to main contractors: they suffer 20% on nearly everything they invoice and have relatively little PAYE to absorb it against. For those firms the deductions are not a minor administrative matter. They are a material and permanent claim on working capital, and the honest fix is usually gross payment status rather than better reclaim procedure.

After the year end

Once the tax year has ended, any deductions still unrecovered can be set against other liabilities, including Corporation Tax, or repaid to the company.

Two timing points that cause real delays. Claim too early and HMRC's records may not yet show all of the previous year's deductions, which produces either a hold-up or a payment for the wrong amount, so let the year close properly first. And HMRC will want the evidence: payment and deduction statements from the contractors who paid you, matching what you have claimed. Firms that file those statements as they arrive have a straightforward claim. Firms that have to ring round eleven contractors asking for copies of statements from fourteen months ago have a long one.

If you are not a limited company

The EPS route is for companies. A sole trader or partnership does not offset CIS deductions through payroll at all: the deductions suffered go on the Self Assessment return, are set against the income tax and Class 4 National Insurance due for the year, and any excess is repaid after the return is filed.

Practically that means a sole trader waits longer, because recovery happens once a year rather than every month. It is also why the CIS position is one of the genuine arguments for incorporating for a labour-heavy subcontractor, alongside all the arguments against.

Why the money piles up

Four causes, in rough order of how often they turn out to be the one.

• The EPS is filed without the CIS figures. Payroll is run, the submission goes in, and the deductions suffered box is left empty because whoever runs payroll has never been given the figures. This is the most common single cause and it is invisible from the payroll side.
• Nobody holds the statements. Payment and deduction statements arrive by email, by post, and inside remittance advices, from a dozen contractors on different cycles. If they are not collected as they come in, the monthly figure cannot be produced on time, so it is not reported.
• Deductions are taken on the wrong base. A contractor deducting from materials as well as labour is over-deducting, and the difference is real money that then has to be recovered through this same slow machinery.
• The company reconciles annually rather than monthly. Anything found in month eleven has already cost eleven months of the cash it represented.

This is tax, and the details turn on your own circumstances, your payroll arrangements and your registration status. Take the above as the shape of the mechanism and settle the specifics with your accountant, who can also tell you in about ten minutes whether the EPS you are already filing has the figures on it.

Where to start, on Monday

One question, asked of whoever runs your payroll: does the EPS we file each month have CIS deductions suffered on it, and what was the figure last month. If the answer is no, or nobody is sure, you have found the problem and it is fixable this month rather than next year.

Then add up the deductions on your payment and deduction statements for the current tax year to date and compare that with what your payroll has actually offset. The gap between those two numbers is money you have earned, that is sitting with HMRC, and that you are currently financing. Most firms doing this for the first time are surprised by the size of it.