Manage your cashflow when CIS deductions are taken

The deductions contractors take under the Construction Industry Scheme are advance payments towards your tax and National Insurance, not an extra tax. They still leave you with less cash than you have earned, while you pay for materials, tools, vehicles and living costs.

Know what is deducted

Give each contractor exactly the name and Unique Taxpayer Reference you registered with, so that they can verify you. On £5,000 of labour a month at the 20% rate, a contractor holds back £1,000 and you receive £4,000.

Price and budget on what you receive

Work out your prices from the cash you need after the deduction, not from the invoice total. If you need £4,000 a month from labour to cover your costs, you must invoice £5,000 of labour. Shorter payment terms, or staged payments on larger jobs, narrow the gap between earning money and having it.

Show materials separately

Because deductions apply only to labour, a clear invoice keeps more cash with you.

Keep your payment and deduction statements

Keep every statement your contractor gives you. If one is lost, ask the contractor for a replacement. If you cannot get your statements, for example because the contractor has gone out of business, write to HMRC with your name, address and Unique Taxpayer Reference, the contractor's name and address, the dates of payment and the reason you have no statements.

Claim your deductions back

Plan for a refund or a bill

Deductions are set against your whole tax liability, so they can leave you with a refund or a bill. You are likely to get money back when your profits turn out lower than the payments suggest, for example because of allowable expenses, a quiet spell or start-up costs. If you earn £50,000 of labour and contractors deduct £10,000, but your tax and National Insurance after expenses come to £7,500, you are due £2,500.

You may owe more if your profits are higher than you expected, you have other income, or you owe Class 4 National Insurance on top of Income Tax. Keep a separate account for tax and move money into it as you are paid, so that a bill does not surprise you.

Consider gross payment status

Gross payment status removes the deductions, but you then set aside and pay all your own tax.