Every time you pay a subcontractor, you make a tax decision. Most firms don’t notice they’re making it. Someone in the office picks up the invoice, knocks a percentage off for the taxman, and pays the rest. Usually the percentage is right. Sometimes it isn’t. And when it’s wrong, the gap doesn’t land on the subcontractor. It lands on you.
If you’re not certain what that percentage is or where it comes from, here’s the plain version. Almost every construction firm that pays other firms for building work sits under something called the Construction Industry Scheme — everyone shortens it to CIS. The rule is simple to state. When you pay a subcontractor, you don’t hand over the full amount. You hold back a slice of the labour part of the bill and send it straight to HM Revenue and Customs, the tax office, as an advance on that subcontractor’s tax. Materials are left out of the sum. Labour is what gets docked.
The rate isn’t yours to guess
There are three rates, and which one applies is not a matter of opinion. It’s a fact HMRC holds, and your job is to go and get it. Before you pay a subcontractor for the first time, you’re meant to “verify” them — a quick check with HMRC that tells you the rate to use. If the subcontractor is registered and HMRC recognises them, the rate is twenty per cent. If they’re not, it’s thirty. And a smaller number have what’s called gross payment status, which means you pay them in full and deduct nothing — HMRC trusts them to sort their own tax.
That twenty-or-thirty gap is where firms get caught. Say a subcontractor should be on thirty because they never registered, and you pay them on twenty because nobody checked. The missing ten per cent doesn’t quietly disappear. It’s tax you were supposed to deduct and didn’t, and HMRC comes to you for it — not to the subcontractor who’s already been paid. You can end up out of pocket for a deduction you never made, on a job that’s long finished.
So the rate matters on every single payment. And the trouble is that it doesn’t stay still.
Last year’s answer isn’t this year’s
Gross payment status — the zero-deduction one — isn’t permanent. A subcontractor earns it by passing HMRC’s tests: enough turnover, and a clean record of filing returns and paying tax on time. Since April 2024 that clean record includes VAT. Fall behind, and HMRC can take the status away. So a subcontractor you correctly paid in full last year might need twenty per cent knocked off this year — and nothing tells you the day it changes. You find out when it bites.
Then there’s the 19th
Getting the deduction right is only half of it. Every month you also have to tell HMRC what you did. That’s the monthly CIS return: a list of the subcontractors you paid that month and the amounts you held back, sent in by the 19th of the month. Miss a month where you happened to pay nobody and you’re still not off the hook — you have to file a “nil return” that says exactly that, or tell HMRC you’ve paused. Silence counts as a miss.
And the penalties start the moment you’re late. One day past the 19th is a hundred pounds. Two months late is two hundred on top. It keeps climbing from there, and for returns that drift months behind it reaches into the thousands. None of that is for owing money. It’s purely for being late with a form.
The facts are knowable. They’re just in the wrong place
Here’s what nags at me about all of this. Nothing about it is uncertain. Every subcontractor has a rate. Every rate came from a verification you did on a specific date. Every month has a return and a deadline. None of it is a judgement call.
But it ends up scattered. The verification result is an email someone opened once. The rate lives in the head of whoever pays the invoices. The deadline lives in the same head, competing with forty other things. So the rate gets guessed, the re-check never happens, and the 19th arrives while everyone’s looking at a job that’s on fire. The knowledge exists. It’s just nowhere that will prompt anyone to act on it.
What actually fixes it
This is not a job for a big platform. It’s a job for a register that pays attention. One list of every subcontractor you use, and against each one the things that matter: their tax reference, the date you last verified them, the rate that came back, and the status that rate depends on. From that, two useful things follow. It can flag the subcontractor whose verification is getting old, before you pay them on a stale rate. And it can assemble the figures for the monthly return, so the 19th becomes a five-minute job instead of an evening of cross-checking.
That’s a small piece of software. It’s shaped around two plain questions — what rate applies to this person today, and what do we owe HMRC this month — rather than being a tax module buried in a system you bought for something else and half set up. The whole value is that it remembers and prompts. A spreadsheet just sits there.
Where this doesn’t apply
If you’re only ever a subcontractor — you get paid for labour but you don’t pay other firms yourself — then CIS deductions are someone else’s problem to get right, not yours. If you already hand the whole thing to an accountant or a payroll bureau who verifies your subcontractors and files your returns, and it runs clean, leave it well alone; this is exactly the kind of work worth paying someone to take off your desk. And if you only ever use the same two subcontractors you’ve worked with for a decade, a register is overkill — you already know their rates by heart.
But if you’re a mid-sized firm taking on new subcontractors through the year, applying rates from memory, and filing the return in a scramble each month — some of those rates are wrong, and the gap is yours to cover.
If you want to know whether your deductions would survive a proper look, get in touch.