Making Tax Digital · Sole traders
Construction Industry Scheme (CIS) under MTD: how deductions work
ONLY£15A MONTHA contractor's payment can look smaller than the work you invoiced because tax has already been deducted under CIS.
A contractor's payment can look smaller than the work you invoiced because tax has already been deducted under CIS. Making Tax Digital does not turn that deduction into a second tax charge. The task is to record the gross income, business costs and CIS deduction separately.
A deduction is tax paid in advance
HMRC's CIS guidance explains that deductions count towards tax and National Insurance. Registered subcontractors normally face 20% deductions; the rate is normally 30% where the subcontractor is not registered, while gross payment status can allow payment without deduction.
The calculation is not always 20% of the whole invoice. Qualifying materials and VAT require separate consideration. Keep the contractor's payment and deduction statement alongside your invoice and bank payment.
Do not put CIS withheld into materials, wages or another operating-expense category. Your trading profit and the credit for tax deducted answer different questions. Equally, the net bank receipt alone can understate income used in an MTD qualifying-income check.
Quarterly summaries do not themselves produce a guaranteed refund. The annual calculation brings together your taxable position and deductions; the process for requesting an available repayment is separate.
Worked example: labour and materials
Assume a non-VAT invoice contains £2,000 labour and £500 qualifying materials at cost. With a 20% CIS deduction on the labour element, the contractor withholds £400 and pays £2,100.
| Item | Amount |
|---|---|
| Gross business income | £2,500 |
| Materials cost, if allowable | £500 |
| CIS tax deducted | £400 |
| Amount received in the bank | £2,100 |
The £400 is not another trade expense. Keep it available for the tax-deduction record and check the contractor's statement agrees.
Reconcile receipts, not just bank payouts
A bank deposit is not always the original sale. A platform, card processor or agent may deduct fees before sending you the balance. Keep the statement showing the gross amount, deductions, refunds and final payout, then explain the difference in your records.
Cash needs the same attention. Record customer cash when received under the cash basis, even if some of it is spent before the rest reaches the bank. Banking cash already recorded as a sale is a transfer between your cash and bank records, not another sale.
HMRC's record-keeping guidance covers income and business expenses. The useful practical test is whether another person could follow a payment from the original sale to the amount received without counting it twice.
Do not use bank feeds as a reason to ignore payment accounts, credit cards, cash or payments made personally for the business. List every place where business money passes, choose the source for each type of transaction and review transfers between those sources. This turns reconciliation into a repeatable check rather than a search through several unrelated statements.
Keep the evidence connected to the figures
Your digital record should explain the amount, date and nature of the transaction. Keep the invoice, receipt, statement or other evidence that supports it. A photograph can make a paper document easier to retain, but a folder of photographs alone does not create complete transaction records.
For sole traders, HMRC normally requires business records to be kept for at least five years after the relevant 31 January filing deadline. Keep them longer where the rules for a late return, enquiry or other circumstances require it. Check the record-retention guidance.
Make the records usable by your future self. Include a short explanation where a bank description is vague, retain the calculation behind a business-use split and make corrections traceable. For a missing receipt, try the supplier account, email confirmation or a replacement invoice before relying on incomplete evidence.
At review time, compare your records with the bank or payment account and investigate differences. Equal totals are useful, but two errors can cancel each other out. A sample of individual transactions can reveal a duplicated purchase or an omitted customer receipt that a totals-only check misses.
Where this fits into Making Tax Digital
For 2026/27, the first mandatory phase generally covers individuals whose combined qualifying self-employment and property income was more than £50,000 in 2024/25, subject to exemptions. Qualifying income normally means income before expenses. It is a different figure from taxable profit. Check the qualifying-income rules.
Once within MTD, keep the required digital records and send quarterly summaries for each relevant business. The summaries are cumulative from the start of the reporting year. They do not contain your entire personal tax position, and sending one does not itself create a quarterly tax-payment demand.
HMRC does not require accounting or tax adjustments before each quarterly update. Those adjustments and the other information needed for the annual return still have to be completed at the appropriate stage. Keep a review list so a matter deferred until year end is not forgotten. Read HMRC's quarterly-update guidance.
Software can organise the information, but the business facts remain essential. Review the figures you approve rather than assuming that a successful import has also settled every tax question.
Check every contractor separately
Collect statements throughout the year, compare gross payments and deductions, and query missing or incorrect details promptly. Check whether software supports the CIS information you need at year end. Avona AI suggestions should be reviewed against the statement; a bank deposit alone cannot establish the correct deduction.
Take the next step
Avona.app offers a self-service route from £15/month. Bring your records together, review the figures and choose a workflow that fits your business. For professional help, discuss the scope and total price of Avona Concierge, managed by chartered accountants, before choosing a service.