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Part of Payroll software for CIS subcontractors: what to check
Payroll software for CIS subcontractors: what to check
CIS deductions, HMRC verification and monthly returns make construction payroll different. Here is what to check in payroll software for CIS subcontractors.
What to take away
- CIS payroll runs alongside PAYE: verify each subcontractor with HMRC, apply the correct deduction rate, then file a monthly CIS return.
- Standard rates are 20% for verified subcontractors, 30% for unverified ones and 0% where HMRC has granted gross payment status.
- Software must separate labour from materials, VAT and most plant hire, because only the labour element is deducted from.
- Verification numbers, rates and payment histories belong in the software, not a spreadsheet, so an HMRC query can be answered quickly.
- CIS returns are due 14 days after the end of the tax month in which you paid the subcontractor.
Where CIS sits in the payroll run
CIS is the Construction Industry Scheme, set out in the Finance Act 2004. A contractor deducts tax from a subcontractor's labour at source, then pays that money to HMRC on the subcontractor's behalf.
Most employers know one payroll rhythm: PAYE, National Insurance, pensions and a Full Payment Submission. A construction firm also runs a second cycle: verify each subcontractor, deduct at the right percentage and list the payment on a monthly return.
Businesses whose main trade is not construction can still be caught. HMRC guidance treats a firm as a contractor when its average annual construction spend exceeds £3 million over three years.
Verification is a one-off step per subcontractor
- Collect the subcontractor's unique taxpayer reference, trading name and address, plus the company registration number if they trade through a limited company.
- Use the Companies House register to check the legal name and company number before sending details to HMRC, since a mismatch is a common cause of failed verification.
- Verify through the HMRC service online, or let the payroll software call it and store the answer.
- Record the deduction rate HMRC returns and the verification number against that subcontractor.
- Re-verify when a subcontractor changes name, address or legal form, because the old number may no longer be valid.
What CIS payroll software has to do
| Job | What to look for |
|---|---|
| Verification | Calls the HMRC service and stores the rate, verification number and date |
| Deductions | Splits labour from materials, VAT and plant hire, then applies 20%, 30% or 0% |
| Monthly return | Produces the CIS300 and files it before the 14th of the following month |
| Statements | Issues a deduction statement to every subcontractor, including companies |
| Payroll join-up | Handles someone who is both employee and subcontractor without double counting |
| Records | Keeps a three-year trail of payments, rates and returns |
The monthly return is where buyers get caught out. It is filed separately from the FPS and lists payments by tax month rather than tax year, so software that only reports on employees will not produce it.
The labour split is the second test. A package that deducts from the whole invoice creates corrections you then unpick by hand. We set out that test in comparing payroll suppliers on one scenario.
Records, data protection and the subcontractor's side
You hold personal data about subcontractors: names, addresses, UTRs and payment amounts. UK GDPR rules on lawful basis, accuracy and retention apply, and the ICO's UK GDPR guidance is the place to start.
Keep CIS records for three years after the end of the tax year they cover. HMRC can ask to see verification details, payment records and the returns you filed.
Subcontractors are not employees. Money deducted under CIS counts towards their own tax bill, offset against Self Assessment or corporation tax, so they need a clear statement from you.
Choosing CIS payroll software
Judge packages on the CIS cycle, not the payroll badge. Ask for a demonstration using one subcontractor who is part verified and part unverified, plus a materials-only invoice, and watch what the software posts.
Cost matters less than correction work. A higher monthly fee is often cheaper than a clerk unpicking deductions every month.
Ask how the software reports status, too. A clear state such as verified, return filed or correction outstanding tells you more than one green tick, which is the point of measuring payroll by workflow state.
General guidance only: whether a business counts as a contractor, or how a disputed deduction is corrected, needs a qualified adviser.
Common questions
Does CIS apply to limited company subcontractors?
Yes. CIS covers sole traders and companies alike. A company subcontractor still receives a deduction statement unless it holds gross payment status.
Can ordinary payroll software handle CIS?
Some packages include a CIS module; others bolt on a separate product. Check that verification, the monthly return and deduction statements sit in one place, or you will reconcile two systems every month.
What happens if I use the wrong deduction rate?
Correct it as soon as you spot it. Deduct too little and HMRC can require the contractor to pay the difference; deduct too much and the subcontractor claims a repayment.
How long must I keep CIS records?
Three years after the end of the tax year they relate to. HMRC can ask to see verification numbers, payment records and filed returns.