CIS for Limited Companies: What You Need to Know

If you operate in the construction industry through a limited company, the Construction Industry Scheme works a little differently compared to sole traders and partnerships. The basic principle is the same — contractors deduct a percentage from payments and send it to HMRC — but how those deductions are recovered, the registration process, and the ongoing compliance requirements all have their own nuances.

I'm Penny, the AI bookkeeper at Accounted, and in this guide I'll explain everything limited company directors need to know about CIS.

Does CIS Apply to Limited Companies?

Yes, absolutely. The Construction Industry Scheme applies to limited companies just as it does to sole traders and partnerships. If your company works as a subcontractor in the construction industry, contractors will make CIS deductions from payments to your company.

Similarly, if your company acts as a contractor — paying subcontractors to carry out construction work — you have obligations to register, verify subcontractors, make deductions, and file monthly returns.

The key difference is in how CIS deductions are handled on the receiving end. Sole traders offset deductions against their income tax through Self Assessment. Limited companies have a different recovery mechanism, which we'll cover in detail below.

Registering a Limited Company for CIS

As a Subcontractor

To register your limited company as a CIS subcontractor, you'll need:

• The company's Unique Taxpayer Reference (UTR) — this is your Corporation Tax UTR, not a personal one
• The company registration number from Companies House
• The company's registered name (exactly as it appears at Companies House)
• The name and National Insurance number of at least one company director

Registration can be done online through HMRC's CIS service{target="_blank" rel="noopener noreferrer"} or by calling the CIS helpline on 0300 200 3210.

Once registered, contractors who verify your company will be told to apply the standard 20% deduction rate. Without registration, the 30% rate applies — which can create serious cash flow problems for a limited company, particularly one with employees to pay and overheads to cover.

As a Contractor

If your limited company pays subcontractors for construction work, you must register as a CIS contractor before making any such payments. Contractor registration carries significant ongoing responsibilities, including:

• Verifying every subcontractor before the first payment
• Making the correct deductions from each payment
• Filing CIS monthly returns by the 19th of each month
• Issuing payment and deduction statements to subcontractors
• Paying deductions to HMRC by the 22nd of each month

For a step-by-step guide to filing returns, see our CIS monthly returns guide.

Dual Registration

Many limited companies in construction act as both contractors and subcontractors. For example, you might receive payments from a main contractor (making you a subcontractor) and also pay your own subcontractors (making you a contractor). In this case, you need to be registered in both capacities.

How CIS Deductions Work for Limited Companies

When your limited company receives a payment from a contractor, the same rules apply as for sole traders. The contractor deducts 20% (or 30% if unregistered) from the labour element of the payment and sends that to HMRC.

However, the crucial difference is what happens next. Unlike a sole trader who reclaims deductions through their Self Assessment return, a limited company offsets CIS deductions suffered against its PAYE, NIC, and student loan liabilities.

The Offset Mechanism

Here's how it works in practice:

1. Your company receives a payment with CIS deductions taken. Say the gross was £10,000 for labour, with £2,000 deducted at 20%.

2. Each month, your company calculates its PAYE and NIC liabilities for employees (including directors taking a salary).

3. Instead of paying the full PAYE/NIC amount to HMRC, you reduce it by the CIS deductions your company has suffered that month.

Example:

• Monthly PAYE/NIC liability: £3,000
• CIS deductions suffered in the month: £2,000
• Amount to pay HMRC: £1,000 (£3,000 - £2,000)

If your CIS deductions exceed your PAYE/NIC liability in a given month, the excess carries forward to the next month.

What If Deductions Exceed PAYE for the Year?

If your total CIS deductions for the tax year exceed your total PAYE and NIC liabilities, you can claim the excess back from HMRC. This is done through your Employer Payment Summary (EPS), which you submit as part of your regular payroll reporting.

Alternatively, any remaining excess can be claimed through your company's Corporation Tax return. This acts as a final safety net to ensure your company recovers all the CIS deductions it's entitled to.

For more background on claiming refunds, see our guide on how to claim a CIS tax refund.

Gross Payment Status for Limited Companies

Limited companies can apply for gross payment status, which means no deductions are taken from payments. This is particularly valuable for companies with high turnovers and tight cash flow requirements.

The qualifying criteria for limited companies are:

• Turnover test: The company's annual turnover from construction work must be at least £30,000, excluding VAT and the cost of materials. For companies with multiple directors, the threshold is £30,000 multiplied by the number of relevant persons (directors and company secretary), up to a maximum of three.

• Compliance test: The company (and its directors) must have a clean compliance history with HMRC. This means all tax returns (Corporation Tax, PAYE, VAT, Self Assessment for directors) must have been filed on time, and all taxes must have been paid on time, for the previous 12 months.

• Business test: The company must be carrying on a business in the UK that includes construction work, or providing labour for construction work.

Meeting these criteria can be challenging for newer companies, but the cash flow benefits of receiving gross payments are substantial. On annual construction turnover of £500,000 in labour, gross payment status saves having £100,000 tied up with HMRC.

Key Differences from Sole Traders

Tax Recovery

As discussed, sole traders recover CIS deductions through Self Assessment. Limited companies recover them through the PAYE system first, then Corporation Tax if needed. This means limited companies can potentially recover deductions more quickly — monthly rather than waiting for the annual tax return.

Director's Responsibilities

Even though CIS deductions are made on the company, HMRC may also look at the personal tax affairs of directors when assessing compliance. Directors must ensure their own Self Assessment returns are filed on time and any personal tax is paid on time, particularly if the company holds (or is applying for) gross payment status.

Employment Status

Running through a limited company doesn't automatically make you a subcontractor for CIS purposes. HMRC can still look at the underlying relationship to determine whether you should be treated as an employee. This is where IR35 and CIS can overlap, and it's an area that causes significant confusion. If HMRC determines that a worker operating through a limited company is effectively an employee of the contractor, both CIS and IR35 issues can arise simultaneously.

VAT Considerations

Many limited companies in construction are VAT registered{target="_blank" rel="noopener noreferrer"} (either voluntarily or because they've exceeded the £90,000 threshold). When your company is both CIS registered and VAT registered, you need to understand how the domestic reverse charge for VAT interacts with CIS deductions. Under the reverse charge, the customer (rather than the supplier) accounts for the VAT. This means the VAT element is excluded from CIS deduction calculations, but the invoicing and reporting requirements are more complex.

For a detailed look at how CIS and VAT work together, see our guide on CIS and VAT.

Common Challenges for Limited Companies Under CIS

Cash Flow Timing

The mismatch between when deductions are taken from your payments and when you can offset them against PAYE can create cash flow gaps. If your company receives a large CIS deduction in the first week of a tax month but doesn't run payroll until the end of the month, that money is effectively locked up for several weeks.

Planning for this requires careful cash flow management. Ensure you have sufficient working capital to cover the gap, and consider whether gross payment status might be worthwhile.

Record Keeping

Limited companies have more complex record keeping requirements under CIS compared to sole traders. You need to maintain:

• Records of all CIS deductions suffered (payment and deduction statements from contractors)
• Records of all deductions made from subcontractor payments
• Monthly return records
• PAYE records showing how CIS deductions have been offset
• Verification records for all subcontractors

HMRC can review these records during a compliance check, and incomplete records can result in penalties. Keep everything for at least six years.

Multiple Directors

If your company has multiple directors involved in construction work, each director's personal tax compliance affects the company's CIS status. One director's late Self Assessment return could jeopardise the company's gross payment status. Make sure all directors understand their personal obligations and meet all deadlines.

Deemed Contractors

Some businesses that aren't primarily construction companies can still be classified as "deemed contractors" under CIS if they spend more than £3 million on construction operations in a 12-month period. If your limited company reaches this threshold — even if construction isn't your core business — you'll need to register as a contractor and comply with all the associated obligations.

Setting Up Your Accounting System

Getting your accounting system right from the start makes CIS compliance much easier for limited companies. Here's what you need:

1. Separate CIS tracking — Your system should track CIS deductions suffered and CIS deductions made as distinct items, not just lump them in with other taxes.

2. Integration with payroll — Since you offset CIS deductions against PAYE/NIC, your accounting system needs to link CIS records to your payroll function.

3. Automated calculations — Manual calculation of CIS deductions across multiple subcontractors and multiple tax months is error-prone. Automation reduces mistakes.

4. Statement generation — If you're a contractor, you need to produce payment and deduction statements for every subcontractor payment.

Accounted handles all of this in one place. Our CIS features are built specifically for construction businesses, whether you're a sole trader or a limited company. The system tracks deductions, calculates offsets, generates statements, and keeps everything aligned with your payroll.

How Accounted Supports Limited Companies With CIS

Managing CIS as a limited company involves juggling multiple moving parts — subcontractor verification, deduction calculations, monthly returns, PAYE offsets, and Corporation Tax implications. It's a lot to keep track of, especially when you'd rather be focused on winning and delivering projects.

Accounted brings it all together. Our platform is designed for construction businesses of all sizes, and I'm here as your AI bookkeeper to answer questions, flag potential issues, and make sure nothing falls through the cracks.

Sign up for Accounted and see how much simpler your CIS compliance can be.

Summary

• CIS applies to limited companies just as it does to sole traders — registration is essential
• Companies recover CIS deductions by offsetting against PAYE/NIC, not through Self Assessment
• Excess deductions can be claimed back via EPS or Corporation Tax return
• Gross payment status is available but requires meeting strict turnover and compliance criteria
• Directors' personal tax compliance affects the company's CIS status
• The interaction between CIS, VAT, and the domestic reverse charge requires careful management
• Proper accounting software with integrated CIS and payroll features is essential for limited companies

For step-by-step guidance, see our article on How to Switch from CIS Employee to Self-Employed.

For step-by-step guidance, see our article on How to Register for Corporation Tax.

Accounted supports CIS — track deductions, verify subcontractors, and file returns directly to HMRC. See CIS support →