How do I make sure my subcontractors are paid correctly?
To pay subcontractors correctly, you must verify their CIS status with HMRC before paying, calculate the right deduction rate (0%, 20% or 30%), deduct CIS only from the labour element (not materials), issue a Payment & Deduction Statement, and report it on your monthly CIS return. Done properly, it protects your cashflow and avoids HMRC penalties.
Why does paying subcontractors correctly matter so much in construction?
Because when subcontractor payments go wrong, the pain shows up in three places:
- HMRC compliance risk (CIS penalties)
- Profit margin distortion (your jobs look profitable… until they don’t)
- Cashflow chaos (overpayments, duplicate payments, incorrect deductions)
At Thomas Emlyn Ltd, we see this constantly: business owners are doing strong turnover, staying busy, but losing money quietly because subcontractor payments aren’t controlled.
The good news? This is fixable with a clear process.
What is CIS and how does it affect subcontractor pay?
The Construction Industry Scheme (CIS) is HMRC’s system for collecting tax from subcontractors in construction. Contractors must:
- verify subcontractors
- deduct tax at the correct rate
- submit monthly CIS returns
- issue payment & deduction statements
HMRC sets the deduction rate based on the subcontractor’s status:
- 0% (Gross payment status)
- 20% (Registered subcontractor)
- 30% (Not registered)
HMRC’s contractor guidance (CIS 340) makes clear that payments must reflect the subcontractor’s tax status and deductions apply to the labour element. (GOV.UK)
How to pay subcontractors correctly: a simple step-by-step system
1) Confirm whether you’re a “contractor” under CIS
Many firms assume CIS only applies to “main contractors”. Not true.
You’re a contractor if you pay subcontractors for construction work and your business meets CIS contractor rules (including some property developers and businesses that spend heavily on construction). HMRC has a specific contractor checklist. (GOV.UK)
Practical tip: If you pay labour-only, supply-and-fit, or trade subcontractors — you’re almost certainly in CIS territory.
2) Verify every subcontractor before the first payment
Before you pay someone for the first time, you must verify them with HMRC. That tells you whether to deduct 0%, 20% or 30%. (GOV.UK)
What you need from them:
- Business name
- UTR (Unique Taxpayer Reference)
- National Insurance number (sole traders) or company number (Ltd)
- VAT number (if VAT registered)
- Address
Why verification matters:
If you guess their status and under-deduct, HMRC can still come after you.
3) Separate labour and materials correctly
This is where most construction businesses leak profit and create HMRC risk.
Under CIS, you deduct tax from the labour element only, not the cost of materials (as long as materials are properly evidenced). (GOV.UK)
Example (real-world style)
A subcontractor invoice says:
- Labour: £2,000
- Materials: £600
- Total: £2,600
If CIS rate is 20%:
- CIS deducted from labour: £2,000 × 20% = £400
- You pay the subcontractor: £2,600 − £400 = £2,200
✅ Correct
❌ Incorrect would be deducting from £2,600 and short-paying them.
Thomas Emlyn Ltd insight:
When this is done wrong, subcontractors complain, relationships sour, and your books become impossible to trust — which makes margin tracking useless.
4) Make the deduction rate non-negotiable
HMRC’s system determines the rate, not your subcontractor.
A common scenario:
“Mate, just pay me gross — I’ll sort my tax.”
That’s not how CIS works. HMRC’s process decides whether they’re gross, net or higher-rate. (GOV.UK)
If they’re not registered, HMRC will typically require 30% deductions until they register. (GOV.UK)
5) Issue Payment & Deduction Statements (every month you pay them)
If you deduct CIS, you must provide the subcontractor a Payment & Deduction Statement so they can claim the deduction against their tax. HMRC guidance covers this requirement and format expectations. (GOV.UK)
This is one of the fastest ways to look “professional” and avoid disputes — and it makes subcontractors far less likely to chase you or argue.
Keep it simple:
If you use Xero + CIS software / payroll add-on, these can be generated automatically.
6) Submit accurate monthly CIS returns
Every month, you must submit:
- who you paid
- how much was labour
- how much CIS was deducted
- verification details
This is part of HMRC’s contractor obligations. (GOV.UK)
Why it matters to margins:
If your CIS returns are wrong, your subcontractor costs in your management accounts are probably wrong too — which means your job profitability data is unreliable.
7) Control the operational risk: duplicate payments, overpayments, and missing approvals
This is the part nobody talks about… but it’s where most money disappears.
Here are three very normal construction scenarios we see:
Scenario A: Duplicate invoices
A subcontractor sends an invoice on WhatsApp… then again by email… then chases again.
Result: paid twice.
✅ Fix: one central inbox + invoice number tracking + weekly payment run.
Scenario B: “Cashflow friendly” overpayments
You pay early, outside the cycle, because the subcontractor demands it.
Result: you lose control of cash and create precedent.
✅ Fix: clear payment terms + weekly approvals.
Scenario C: No project-level cost coding
Invoices aren’t assigned to specific sites/jobs.
Result: margins look healthy on paper… but you can’t see which jobs are bleeding.
✅ Fix: mandatory job code on every subcontractor invoice.
A practical “Subcontractor Pay Checklist” you can use this week
Here’s a simple checklist our Virtual Finance Office clients use:
Before onboarding a subcontractor
- Confirm they fall under CIS (construction work)
- Collect UTR / NI / company number
- Verify them with HMRC
- Confirm VAT status
- Agree payment terms (e.g. weekly, fortnightly, 30 days)
Every invoice
- Labour clearly separated from materials
- Materials supported by evidence (receipts / breakdown)
- Correct job/site code
- Approved by site/project manager
Every payment run
- Deduction rate confirmed
- CIS deducted only from labour
- Payment & Deduction Statement issued
- Payment recorded correctly in accounts software
What are the most common mistakes construction businesses make?
Here are the top five we see at Thomas Emlyn Ltd:
- Not verifying subcontractors (or assuming the last status still applies)
- Deducting CIS from materials (or not separating them at all)
- Paying outside a system (random bank transfers, no approvals)
- Not issuing statements (causing disputes and mistrust)
- No cost allocation by job (so margins become guesswork)
How does this link to construction cashflow management and profit margins?
When subcontractor pay is controlled, you get:
✅ Cleaner books
✅ Accurate job costing
✅ Reliable profit margins
✅ Predictable weekly cash requirements
That is the foundation of construction cashflow management — and it’s why a Virtual Finance Office works so well for busy construction firms.
At Thomas Emlyn Ltd, our job isn’t just “accounts”. It’s building a finance system that gives you clarity, control, and confidence.
Want to build a stronger system? Here’s what “good” looks like (simple operating model)
A strong subcontractor payment system has:
- One route for invoices (not scattered across WhatsApp/email)
- Weekly payment run (with approvals)
- CIS verification + deduction rules built-in
- Job costing discipline
- Monthly reporting that shows:
- labour vs materials split
- subcontractor spend per job
- margin per job
- WIP and cash forecast
This is exactly what a Virtual Finance Office should deliver: systems + reporting, not just compliance.
Authority building: why this matters beyond your business
This topic comes up repeatedly in UK construction communities — and it’s a great example of where Thomas Emlyn Ltd provides practical value.
If you run a construction podcast, host events, or partner with:
- builders merchants
- quantity surveyors
- construction software firms (e.g., Xero add-ons, job management platforms)
- industry groups like CITB
…this is the kind of content that positions you as a trusted operator, not “just an accountant.” CITB itself highlights how CIS ties into reporting and levy returns for contractors. (citb.co.uk)
(And if you’d like, we can help you develop a short “CIS mistakes that cost contractors money” talk for trade breakfasts or networking groups — it converts extremely well.)
FAQ: Paying subcontractors correctly (UK construction)
1) Do I always have to deduct CIS from subcontractors?
No. If the subcontractor has gross payment status, you pay them in full. Otherwise you deduct 20% (registered) or 30%(not registered). HMRC determines this through verification. (GOV.UK)
2) Do I deduct CIS from the full invoice amount?
No. CIS is deducted from the labour element only, not materials (when properly identified). If you don’t split labour/materials correctly, you’ll either underpay the subcontractor or create HMRC issues. (GOV.UK)
3) What do I need to give a subcontractor after I deduct CIS?
You must give them a Payment & Deduction Statement showing payments and deductions so they can claim credit for the tax deducted. HMRC outlines this requirement and provides examples in CIS guidance. (GOV.UK)
4) What happens if I pay a subcontractor without verifying them?
You risk deducting the wrong amount. HMRC can still hold you responsible, and you may have to pay the missing deductions or face penalties. Verification is a required step before first payment. (GOV.UK)
5) How can I make subcontractor payments easier without spending hours on admin?
Create a simple payment system: one invoice channel, weekly payment runs, standard approvals, and CIS rules embedded in software. Many firms then outsource the process to a Virtual Finance Office so the owner can focus on running jobs rather than chasing paperwork.
Thomas Emlyn Ltd
Stronger Margins – Healthier Cashflow – Sustainable Growth
