What is CIS suffered?

Under the Construction Industry Scheme (CIS), contractors generally deduct tax from payments made to subcontractors who do not have gross payment status.

For a registered subcontractor, the standard deduction is normally 20% of the relevant payment, although a 30% deduction can apply in certain circumstances. CIS is effectively an advance payment towards the subcontractor’s tax and National Insurance liabilities.

For example:

XYZ Ltd completes £10,000 of construction work for a main contractor.

Assuming the whole amount is subject to CIS and XYZ Ltd is registered for the standard 20% deduction:

Invoice: £10,000
CIS deducted: £2,000
Cash received: £8,000

The £2,000 has not disappeared. The contractor has deducted it and paid it to HMRC on XYZ Ltd’s behalf.

The important question is therefore: how does XYZ Ltd get credit for that £2,000?

Limited companies recover CIS differently from sole traders

This is an important distinction.

If the subcontractor is a sole trader, the CIS deductions are generally claimed through their Self Assessment tax return.

For a limited company, however, the CIS deductions are claimed through the company’s PAYE scheme.

HMRC specifically states that a limited company should not claim CIS suffered through its Corporation Tax return. Instead, the company should use its monthly payroll reporting to claim the credit.

This is where the payroll scheme becomes particularly useful.

How does the PAYE offset work?

Let’s imagine… XYZ Ltd has employees and runs a monthly payroll.

At the end of the month, their payroll software calculates the following:

Normally, XYZ Ltd would pay £3,500 to HMRC. However, suppose XYZ Ltd has suffered £2,000 of CIS deductions from its own income during the month. They can use that £2,000 CIS credit against its PAYE liabilities.

The calculation becomes:

PAYE/NIC liability: £3,500
Less CIS suffered: £2,000
Amount payable to HMRC: £1,500

So rather than XYZ Ltd paying £3,500 to HMRC and separately waiting for its £2,000 CIS credit to be refunded, the two amounts are effectively offset against each other. This is a very useful cash-flow mechanism for construction businesses.

HMRC confirms that companies can set CIS deductions suffered against PAYE, National Insurance, student loan repayments and CIS deductions that the company itself is due to pay to HMRC.

How do you actually tell HMRC about the CIS suffered?

There are two important payroll submissions to understand:

Full Payment Submission (FPS)

You continue to submit the company’s normal payroll and the payroll itself is not changed because of the CIS credit.

Employer Payment Summary (EPS)

The CIS suffered is reported to HMRC through the company’s Employer Payment Summary (EPS). The company enters the amount of CIS deductions it has suffered, and HMRC uses this to reduce the amount of PAYE/NIC and other relevant liabilities payable for the period.

In other words:

Payroll calculates the liability → FPS reports the payroll → EPS reports the CIS suffered → HMRC applies the CIS credit → XYZ Ltd pays the remaining balance.

This is why it is important that your accountant or payroll provider knows that the company is suffering CIS deductions as a subcontractor.

What if the CIS suffered is bigger than the PAYE liability?

This is where things become particularly useful for smaller construction companies.

Imagine XYZ Ltd has:

CIS suffered: £5,000

But their monthly payroll liabilities are only PAYE/NIC: £3,000

XYZ Ltd can use £3,000 of the CIS credit against that month’s liability.

That leaves £2,000 CIS credit remaining.

Their company does not lose the £2,000, the unused amount can be carried forward and used against future PAYE/NIC, student loan and CIS liabilities within the same tax year.

So the following month, if XYZ Ltd has another £3,000 PAYE/NIC liability, they could use the remaining £2,000 CIS credit and only pay £1,000 to HMRC.

Let’s look at XYZ Ltd over three months.

The important point is that the CIS credit is effectively being used to fund the company’s PAYE and other employer liabilities.

This can make a substantial difference to the company’s cash flow, particularly where the company has a relatively large CIS deduction but a comparatively small payroll.

What if there isn’t enough PAYE to use it all?

The credit can continue to be carried forward during the tax year.

However, there is an important limitation:

CIS suffered cannot simply be carried forward indefinitely into the next tax year.

At the end of the tax year, any CIS credit that remains unused is dealt with after the company’s final payroll submissions have been made. HMRC may repay the remaining amount or, in appropriate circumstances, allow it to be set against Corporation Tax liabilities.

HMRC’s current CIS340 says that once the final FPS and EPS have been received, excess CIS deductions that cannot be set off may be refunded or set against Corporation Tax due. It also explicitly says that no repayments or set-offs against other liabilities can generally be made in-year, other than in liquidation or administration.

This is one reason why it is important to keep the CIS suffered records up to date throughout the year rather than leaving everything until the year end.

Keep your CIS deduction statements

Your main contractor should provide you with monthly statements showing the payments made and your CIS deductions taken.

These statements are important evidence of the CIS credit being claimed.

For example, if XYZ Ltd has claimed £15,000 of CIS suffered during the year, they should be able to demonstrate where that £15,000 has come from.

HMRC can ask a company to provide evidence supporting their CIS deductions. If HMRC considers that a claim is incorrect and the company does not provide the requested evidence or amend its claim, HMRC can correct the claim and prevent further claims being made during that tax year.

It is therefore good practice to reconcile:

CIS statements received → CIS suffered recorded in the accounts → CIS claimed on EPS submissions.

Don’t confuse CIS suffered with CIS deducted from your subcontractors

There are two sides to CIS, which can sometimes cause confusion.

1. CIS suffered: CIS deducted from XYZ Ltd’s income by the contractors that XYZ Ltd works for.
2. CIS deducted: CIS that XYZ Ltd deducts from their own subcontractors when they act as a contractor.

If XYZ Ltd does both, the amounts need to be considered separately.

For example:

• XYZ Ltd suffers £5,000 CIS from a main contractor.
• XYZ Ltd deducts £1,500 CIS from their own subcontractors.
• XYZ Ltd has £4,000 of PAYE/NIC liabilities.

The £5,000 CIS suffered can be used against the company’s relevant PAYE, NIC, student loan and CIS liabilities.

So the total relevant liabilities could be:

PAYE/NIC: £4,000
CIS deducted from XYZ’s subcontractors: £1,500
Total: £5,500

XYZ Ltd could use its £5,000 CIS suffered against those liabilities and would therefore pay only:

£500 to HMRC.

HMRC’s guidance specifically confirms that CIS suffered by a limited company can be set against CIS deductions that the company itself is due to pay over to HMRC, as well as PAYE and National Insurance.

A few practical tips

If your limited company suffers CIS deductions, we recommend:

1. Keep every CIS deduction statement
   Make sure the amounts deducted by your contractors reconcile to your accounting records.
2. Tell your payroll provider
   They need to know the company is claiming CIS suffered so that the appropriate EPS submissions can be made.
3. Reconcile the CIS regularly
   Don’t wait until the year end to discover that £10,000 of CIS deductions have not been claimed.
4. Check the EPS submissions
   The CIS suffered needs to be reported through the EPS so HMRC can apply the credit.
5. Monitor the PAYE account
   Make sure the CIS credit has actually been applied to the company’s PAYE account.
6. Keep an eye on the tax year
   Unused CIS credits can be carried forward during the same tax year, but the treatment changes once the tax year has ended.

The bottom line

For a construction company operating as a limited company, CIS deductions suffered are essentially tax already paid to HMRC on the company’s behalf.

The company can normally recover that money by reporting the CIS suffered on its Employer Payment Summary (EPS) and using the resulting credit to reduce its PAYE, National Insurance, student loan and CIS liabilities.

So, in simple terms:

CIS deducted from your invoices → report it on the EPS → HMRC gives the company credit → use that credit against PAYE/NIC/CIS liabilities → pay HMRC only the remaining balance.

For construction businesses with significant CIS deductions, getting this process right can make a real difference to monthly cash flow.