A Construction Tax Recovery Example Explained

A CIS deduction statement showing thousands taken from your invoices can feel like money that has disappeared. It has not necessarily gone for good. This construction tax recovery example shows how a subcontractor’s refund is worked out, what can change the result, and why good records matter long before a Self Assessment return is filed.

For many construction workers, tax is deducted at source under the Construction Industry Scheme (CIS), often at 20% of the labour element of an invoice. That deduction is a payment towards your eventual tax and National Insurance position. It is not automatically the final amount you owe.

Construction tax recovery example: a CIS subcontractor

Take Sam, a self-employed electrician working for several contractors during the tax year. Sam is registered for CIS and paid at the standard 20% deduction rate. The figures below are simplified and assume Sam has no other income, no student loan repayments and no pension contributions. They are intended to show the principle, not replace an individual calculation.

Over the year, Sam invoices £68,000 for labour. His contractors deduct £10,800 in CIS tax and provide monthly deduction statements showing each amount withheld. Sam’s business expenses total £18,400. These include tools and small equipment, protective clothing, public liability insurance, accountancy fees, business mileage, phone costs and a proportion of home-working costs.

His taxable trading profit is therefore:

£68,000 income less £18,400 allowable expenses = £49,600 profit

Assuming a personal allowance of £12,570, Sam has £37,030 of income taxable at the basic rate. Income tax at 20% is £7,406. His Class 4 National Insurance is then calculated on the relevant band of profits. Using a 6% main rate for illustration, this comes to £2,221.80.

That gives Sam an estimated total bill of £9,627.80. But he has already had £10,800 deducted under CIS. Once the return is submitted and HMRC processes it, the overpayment is approximately:

£10,800 CIS deductions less £9,627.80 total liability = £1,172.20 refund

The key point is that Sam is not receiving a refund simply because he works in construction. He receives it because the tax deducted from his income is greater than his final tax and National Insurance liability after allowable expenses and personal allowances have been considered.

Why the refund can be higher or lower

Two subcontractors can earn the same turnover and receive very different refunds. The difference usually comes down to genuine business costs, other sources of income and the amount actually withheld by contractors.

If Sam had failed to keep mileage records, lost invoices for tools or omitted insurance and accountancy costs, he might have claimed only £12,000 of expenses rather than £18,400. His profit would rise to £56,000, increasing his tax bill and reducing - or even removing - the refund.

The reverse can also apply. A subcontractor with higher legitimate expenses, periods without work, pension contributions or charitable donations may have a lower final liability. That can increase the amount of CIS tax recoverable. The figures must be supported by evidence, though. A bigger claim is not better if it cannot be justified.

Your tax position may also be affected by PAYE employment, property income, savings, dividends, a partner’s business, child benefit charges or previous Self Assessment payments on account. This is why online refund estimates can be useful as a rough guide but are not a reliable replacement for a properly prepared return.

The records that support a CIS tax recovery

The first figure to check is the tax deducted, not a bank statement total. Contractors should give subcontractors a monthly CIS deduction statement. It should show the contractor’s details, your details, gross payments, materials where applicable, the amount paid and the tax deducted.

Keep every statement. HMRC may query a CIS credit where the information on the return does not match the contractor’s reports. Missing paperwork can slow a repayment down and, in some cases, make a deduction harder to claim until the position is corrected.

You should also retain invoices, receipts, mileage logs and clear business bank records for your expenses. It is far easier to identify a forgotten cost while the paperwork is organised than to reconstruct a year’s trading activity shortly before the filing deadline.

Not every cost connected with work is allowable in full. Everyday clothing is usually not deductible merely because it is worn on site, whereas specialist protective equipment is normally treated differently. Travel from home to a regular, permanent place of work can be restricted, while travel between temporary sites or to obtain materials may be allowable. Tools, larger equipment, vans and phone use can each have their own rules.

That is where practical advice matters. The aim is not to force every purchase into the return. It is to claim the relief you are entitled to, without creating avoidable risk if HMRC asks questions later.

Materials and CIS deductions can cause confusion

CIS deductions are generally made from the labour part of a payment, not from qualifying materials supplied by the subcontractor. Suppose Sam sends a £2,000 invoice made up of £1,500 labour and £500 materials. If the materials are correctly identified and accepted, the contractor may deduct 20% from £1,500, not from the whole £2,000.

This matters because a deduction made incorrectly can affect cash flow throughout the year. It also makes reconciling your statements to invoices more difficult. Check each payment statement against the work you completed, particularly where invoices contain labour, materials, plant hire or VAT.

VAT is another area where figures are easily muddled. If you are VAT registered, VAT collected is not normally part of your trading income for income tax purposes, and VAT recovered on business costs is not normally claimed again as an expense. Whether the flat rate scheme, standard VAT accounting or reverse charge VAT applies depends on the nature of the work and your registration position.

What happens when a return creates a repayment

A sole trader normally reports construction income, expenses and CIS deductions through Self Assessment. HMRC then calculates the overall position using the full return, rather than looking at deductions in isolation. If more CIS tax has been deducted than is due, the repayment can be requested to a nominated bank account or set against another amount owed to HMRC.

Do not assume a repayment will always arrive immediately after filing. HMRC may carry out checks, particularly where the refund is sizeable, the figures differ from prior years or contractor records do not match. A clean set of deduction statements and organised expense records gives you the best starting point.

It is also worth separating a CIS refund from payments on account. If your tax bill is above the relevant threshold, HMRC may ask for advance payments towards the following year’s bill. This can mean a refund is smaller than expected, or that a current year repayment is used against future liabilities. It is not necessarily an error, but it should be explained clearly so there are no surprises.

Limited companies need a different approach

The example above is for a self-employed subcontractor. A limited company that has CIS deductions taken from its income follows a different route. The company may set CIS suffered against PAYE, National Insurance and other liabilities through its payroll reporting, with any remaining amount dealt with under the relevant HMRC process.

Directors should not put company CIS deductions on their personal Self Assessment return simply because they run the business. Company income, payroll and corporation tax need to be kept separate from personal tax. Getting that distinction right early avoids a messy correction later.

For subcontractors and small construction firms, tax recovery is usually less about finding a clever trick and more about getting the foundations right: accurate CIS statements, sensible expense records and a return that reflects the way the business actually works. If the numbers have been piling up after long days on site, Short And Sons Accountants can help turn them into a clear, supportable tax position.