An over-deduction occurs when a contractor deducts more CIS tax from a subcontractor's payment than the correct amount under the Construction Industry Scheme rules.
The most common causes are:
- Applying the deduction to the full invoice value rather than the labour element only. CIS deductions apply only to the labour portion of a payment; the cost of materials the subcontractor buys for the job is excluded from the deduction base. A contractor who applies 20% to a £1,000 invoice when £400 of it is materials should deduct only £120 (20% of £600 labour), not £200.
- Using the wrong rate, for example deducting at 30% (the unregistered rate) when the subcontractor holds registered status at 20%, or deducting at all when the subcontractor holds Gross Payment Status (0%).
- Failing to re-verify after a subcontractor's status changes.
If a contractor discovers an over-deduction, they should correct it within the same tax year where possible, by reducing a subsequent payment to the subcontractor or issuing a corrected payment and deduction statement. HMRC guidance allows in-year adjustments without penalty provided the contractor acts promptly and keeps a clear audit trail.
Where the over-deduction cannot be corrected in-year, the subcontractor recovers the excess through their Self Assessment return (sole trader) or EPS offset (limited company). The deduction statements the contractor issues are the evidence HMRC uses to verify the claim, so accurate statements matter throughout.
From the subcontractor's perspective, over-deduction is one of the main reasons CIS refunds arise. If your payment and deduction statements show materials being deducted as though they were labour, that is an over-deduction that increases your refund entitlement. A specialist CIS accountant will check the statements against your invoices as part of the refund process.
For a fuller explanation of how CIS deductions are calculated and what the deduction base covers, see our guide to CIS deduction rates.