Self-Employed & MTD
CIS Tax Refund Guide: Why 20% Deducted Does Not Mean a 20% Refund
If you are a registered CIS subcontractor, a contractor will normally deduct 20% from the relevant payment amount and send it to HMRC. That 20% is not your final tax bill. It is an advance payment towards your eventual tax and National Insurance. When your annual figures are prepared, your allowable expenses and taxable profit are calculated first. The CIS already deducted is then credited against the final liability. If the credit is higher than what you owe, a repayment can arise. If it is lower, you can still have tax to pay.
Imagine this…
Raj is a self-employed electrician working on construction sites. During the year, several contractors pay him for labour and materials. Across the year, the contractors deduct £10,000 under CIS and send that money to HMRC.
Raj sees “£10,000 CIS deducted” on his statements and assumes HMRC owes him £10,000 back.
That is the common misunderstanding.
The £10,000 is already sitting with HMRC as a credit. Raj’s tax return still has to work out his actual annual taxable profit and the tax and National Insurance due on that profit.
Simple illustration
In this simplified illustration, the potential repayment is £2,800, not £10,000 and not automatically 20% of annual income. The actual return can also contain other income, payments on account, student loan, earlier liabilities, losses or other adjustments.
So what is CIS actually doing?
Under the Construction Industry Scheme, contractors deduct money from payments to subcontractors and pass those deductions to HMRC. HMRC treats the deductions as advance payments towards the subcontractor’s tax and National Insurance.
For a registered subcontractor, the normal deduction rate is 20%. Where a subcontractor is not registered or cannot be successfully verified, the higher deduction rate is normally 30%. A subcontractor with gross payment status can be paid without CIS deductions.
Is CIS deducted from the whole invoice?
Not necessarily. The CIS calculation focuses on the relevant payment for construction work. VAT is not part of the CIS deduction calculation, and qualifying direct materials paid for by the subcontractor can reduce the amount subject to CIS.
That means a £5,000 invoice does not always mean a £1,000 CIS deduction at 20%. If part of that invoice represents qualifying direct materials, the deduction base can be lower.
Very simple invoice example
This is a simplified illustration. Plant, fuel and other invoice items can need separate CIS treatment, so the actual invoice details matter.
What expenses can reduce a subcontractor’s taxable profit?
CIS is deducted from contractor payments before your full annual business expenses are known. When your accounts and tax return are prepared, legitimate business expenses can reduce taxable profit if they meet the normal tax rules.
Depending on the facts, that can include tools, protective equipment, insurance, accountancy fees, the business element of phone costs, qualifying travel or vehicle costs, and other trade expenses. Larger equipment may be dealt with through capital allowances instead of simply being treated as an ordinary expense.
The key point is not to claim an expense just because you work in construction. The expense still has to meet the relevant tax rule and should be supported by adequate records.
How does a sole trader claim CIS deductions?
A sole-trader subcontractor normally claims credit for CIS deductions through the Self Assessment return. The tax return calculates the annual position, and the CIS already deducted is set against that liability.
Your contractor should give you a payment and deduction statement where CIS has been deducted. HMRC requires the contractor to provide the statement within 14 days after the end of the relevant tax month. Keep those statements because they are the evidence behind the CIS credit you are claiming.
What if the subcontractor is a limited company?
This is one of the most important distinctions.
If a limited company has CIS deducted from payments it receives as a subcontractor, HMRC says the company should claim that credit through its monthly payroll scheme. It should not try to claim the CIS suffered through the Corporation Tax return.
The company normally reports the CIS deductions through the Employer Payment Summary process so the credit can be set against PAYE and National Insurance liabilities. If an eligible excess remains after the year end, there is a separate HMRC repayment process.
What people commonly get wrong
No. The deduction is an advance payment. The refund is whatever credit remains after the final tax calculation and other relevant HMRC amounts.
Tools, travel, clothing and equipment all have rules. A receipt does not automatically make the whole cost tax deductible.
Missing or mismatched contractor records can delay or complicate a repayment claim.
HMRC specifically says limited companies should reclaim CIS suffered through payroll rather than through the Corporation Tax return.
Why am I being deducted at 30%?
The higher rate normally points to a registration or verification problem. You may not be registered for CIS, the contractor may not be able to verify you, or the details supplied may not match HMRC’s records.
If you believe 30% is being deducted incorrectly, do not simply wait until the next tax return. Check the CIS registration and business details because repeated 30% deductions can create an unnecessary cash-flow problem.
Should I apply for gross payment status?
Gross payment status means qualifying contractors pay you without CIS deductions. That can improve cash flow, particularly for established subcontractors with significant labour costs and relatively small final tax liabilities.
It is not simply a box you choose. HMRC applies business, turnover and compliance tests, so whether it is appropriate should be reviewed against the subcontractor’s actual circumstances.
What should you send your accountant?
Start with the evidence, not an estimate of the refund. Useful records normally include:
- payment and deduction statements from each contractor
- business bank statements
- invoices or earnings records
- expense receipts and invoices
- vehicle or mileage information where relevant
- details of tools and equipment
- any missing statements or 30% deductions that need checking
- details of other income that also belongs on the Self Assessment return
A good CIS return is not about trying to produce the biggest possible refund. It is about getting the annual profit, expenses and CIS credit right. A large refund can be perfectly correct, but so can a small refund or an additional tax bill. The supporting records should drive the answer, not the refund figure you were hoping to receive.
Need help with CIS?
Send us the CIS statements before guessing the refund.
SV&Co can review the contractor deductions, business expenses and final tax position for sole traders, or the payroll/EPS route for limited-company subcontractors.
Official sources
GOV.UK — Pay tax and claim back CIS deductions
GOV.UK — Make deductions and pay subcontractors
GOV.UK — Payment and deduction statements
Reviewed by
Sandip Vadher, PhD FCCA
Founder of SV&Co Accountancy. Fellow Chartered Certified Accountant with more than 20 years of finance and accountancy experience.
Last reviewed: 16 August 2026