Managing cashflow when CIS deductions are taken

If you are a CIS-registered subcontractor without gross payment status, contractors deduct 20% from every payment for your labour. This money goes to HMRC as an advance payment of your tax, but it means you receive significantly less cash in hand.

For many subcontractors, this creates real cashflow challenges. You need to pay for materials, tools, vehicle costs, and living expenses, but you are working with only 80% of what you have earned. Understanding how to manage this is essential for your business.

Understanding the real impact

The 20% deduction applies to the labour element of every payment, not to materials you have paid for directly. But the impact on your available cash can be substantial.

Example: monthly cashflow impact

Consider a subcontractor earning 5,000 pounds per month in labour payments (before CIS deductions):

Over a year, 12,000 pounds of your earnings sits with HMRC rather than in your bank account. You can reclaim this through Self Assessment, but you may wait 12-18 months from when the deduction was made until you receive a refund.

Practical cashflow strategies

Managing cashflow under CIS requires planning. These strategies help subcontractors work effectively with reduced cash in hand.

1. Budget based on net income, not gross

When pricing jobs and planning your finances, always calculate based on what you will actually receive (80% of labour), not what you invoice. If you need 4,000 pounds per month to cover costs, you need to earn at least 5,000 pounds gross in labour.

2. Keep deduction records meticulously

Your contractor must give you a Payment and Deduction Statement within 14 days of each tax month end. These statements are essential for reclaiming your deductions. Keep every statement in a safe place - without them, you cannot prove what was deducted.

3. Separate business and tax money

Consider keeping a separate account for tax purposes. Although 20% is already with HMRC, you may owe additional tax if your profits are higher than expected, or you may be due a refund. Tracking this separately helps you understand your true position.

4. Invoice materials separately where possible

CIS deductions apply only to labour, not to materials you pay for directly. If you buy materials and include them on your invoice with evidence, the contractor deducts 20% only from the labour element. Make sure your invoices clearly separate labour and materials, and keep receipts.

5. Consider your payment terms

If you are waiting 30 days or more for payment, plus the 20% deduction, your cashflow gap widens. Where possible, negotiate shorter payment terms or stage payments for larger jobs. Getting paid in 14 days rather than 30 days significantly improves your cash position.

6. Build a cashflow buffer

Aim to keep 2-3 months of operating costs as a buffer. This helps you manage the gap between earning money and receiving it (after deductions), and protects you during quiet periods.

Reclaiming your deductions

The 20% deducted from your payments is not lost - it is held by HMRC against your tax liability. At year end, you can offset it against what you owe, or claim a refund if deductions exceed your tax bill.

How you reclaim depends on your business structure.

When you might get a refund

You are likely to receive a refund of some CIS deductions if:

• Your actual profits are lower than expected (for example, you had significant allowable expenses)
• You had periods where you earned less or were not working
• Your tax liability is lower than 20% of your gross earnings after deducting business expenses
• You are in your first year of trading and have startup costs to offset

Example: If your gross labour income is 50,000 pounds and contractors deducted 10,000 pounds in CIS (20%), but your actual tax and NI liability is only 7,500 pounds after business expenses, you receive a 2,500 pound refund.

When you might owe more

You will owe additional tax at year end if:

• Your profits are higher than expected (fewer expenses than anticipated)
• You have other income sources that push you into a higher tax bracket
• You owe Class 4 National Insurance on top of income tax (compulsory Class 2 NI was abolished from 6 April 2024; it is now only paid voluntarily by those with profits below the small profits threshold)
• You have not kept proper records of allowable expenses

Even with 20% already deducted, you may owe more. Set aside money throughout the year to cover potential shortfalls.

File your Self Assessment early

If you expect a refund, do not wait until January to file your return. You can submit your Self Assessment from 6 April each year for the previous tax year. Filing early means:

• You receive your refund sooner (potentially in May or June rather than waiting until January)
• You know your exact tax position earlier
• You have more time to plan if you owe additional tax
• You avoid the January deadline rush

Should you apply for gross payment status?

If cashflow is a constant struggle, you might consider applying for gross payment status (GPS). With GPS, you receive 100% of your payments with no deductions - but you must pay all your tax yourself, through Self Assessment as a sole trader or partner, or through Corporation Tax as a limited company.

GPS could help if you:

• Have consistent work and net construction turnover above 30,000 pounds per year (the sole trader threshold - partnerships and companies have higher or per-person thresholds)
• Maintain excellent tax compliance (file and pay everything on time)
• Need cash for materials, equipment, or growing your business
• Are disciplined about setting aside money for tax
• Have been in business for at least 12 months with a clean compliance record

GPS might not suit you if:

• You struggle to save money for future tax bills
• Your compliance record has late filings or payments
• Your income fluctuates significantly
• You prefer the certainty of tax being taken at source

With GPS, you receive more cash now but owe the same tax later. If you cannot reliably set aside 20-30% of your earnings for tax, the deduction system may actually help you by forcing tax discipline.

The GPS eligibility requirements

To qualify for GPS, you must pass three tests:

What happens if you lose GPS

If you have GPS and lose it (through compliance failures), the cashflow impact is immediate and significant. You go from receiving 100% of payments to receiving 80% overnight. This can cause serious business difficulties.

Practical steps to take now

1. Check your records - Gather all your Payment and Deduction Statements. If any are missing, request them from your contractors.
2. Calculate your position - Add up your CIS deductions for the year. Compare this to your estimated tax liability to see if you are likely to get a refund or owe more.
3. File early if due a refund - Do not wait until January. File your Self Assessment as soon as the tax year ends (after 6 April) to get your money back sooner.
4. Review your pricing - Make sure your job quotes account for the 20% deduction. You need to earn more gross to achieve your target net income.
5. Consider GPS - If you meet the turnover threshold and have a clean compliance record, applying for GPS could significantly improve your cashflow.

Related guides

• Apply for CIS gross payment status - How to apply if you decide GPS is right for you
• Claim a refund for CIS deductions - Detailed process for reclaiming deductions
• File your Self Assessment tax return - Step-by-step guide to filing
• Keep your gross payment status - How to maintain GPS once granted