Example of a CIS deduction calculation

The subcontractor presents an invoice for £10,000 plus VAT, totalling £12,000.

The invoice specifies that the £10,000 includes:

• £2,000 for materials
• £500 for plant hire
• £500 for consumables

This totals £3,000, all of which can be excluded from the deduction calculation.

With the removal of the VAT and the other amounts above, the amount to be included in the calculation is now £7,000.

The CIS deduction percentage from HMRC is 20%. Therefore, the contractor must hold back £1,400.

Under a separate scheme, the VAT reverse charge, the contractor must also hold back the VAT of £2,000.

The contractor pays the subcontractor £8,600 and pays HMRC £3,400 (the total of the VAT and the CIS deduction).

CIS and cashflow

Whether you're a contractor or subcontractor, you need to stay alert to the implications of the CIS, in order to manage your finances as effectively as possible and get your bookkeeping right. 

Cashflow for contractors

Under the CIS, contractors are obliged to pay some of the money billed by subcontractors to HMRC. This makes little difference to cashflow, because the amount being paid is the same, it's just split between two different recipients.

However, this does require the contractors to keep detailed records and accounts, and produce specific returns on a regular basis. There's a risk of the contractor being required to make good any amounts that HMRC considers it should have deducted from subcontractor payments, but has not. Because a subcontractor’s status under CIS can change, there's a risk that contractors deduct too little because they are not aware of the status change.

Cashflow for subcontractors

Under CIS there's a good chance that many bills submitted to contractors will not be paid in full, because of the amount deducted and paid to HMRC under the CIS. Of course, this money isn't lost, it's simply held on account against future tax liabilities. It's effectively pay-as-you-earn tax accounting. There are actions that help minimise the impact of this, such as registering as a subcontractor and ensuring that all bills clearly itemise those elements that can be deducted, such as cost of materials.

Cashflow planning is particularly important where there are employees to pay and potentially other subcontractors who are working for you.

Support for operating the Construction Industry Scheme

The CIS, while simple in theory, can be extremely complex in practice. It's wise to take professional advice about setting it up and operating it in your business, whether you're a contractor or subcontractor. There are a number of software tools that can help with issues and calculations around CIS, including many accounting systems. 

Detailed information about the CIS is available from the Gov.uk website.

We help construction businesses overcome cashflow challenges

While planning and preparation is often enough to help construction firms manage their cashflow, sometimes circumstances disrupt what should be a relatively smooth operation. A customer pays late, a significant tax bill arrives unexpectedly, or you need cash to invest in a new commercial project.

Whatever the reason, we're here to help. Every day our business finance specialists take calls from firms that need an extra injection of cash - sometimes urgently.

If you're looking for a new source of working capital, for whatever reason, we can probably help you secure it at a competitive rate. To find out more, get in touch with us today.