A CIS Subcontractor’s Bank Credits Are Net of Tax: Which Income Might a Mortgage Lender Use?

The Client Situation

The accountant may hear:

• “My contractor takes 20% before paying me.”
• “My bank statements make my income look too low.”
• “My latest tax return covers a quieter year.”
• “I now have gross payment status.”
• “I changed from PAYE to CIS six months ago.”
• “The statements include materials and plant hire.”
• “My limited company suffers the CIS deduction.”
• “One contractor has not issued replacement statements.”
• “I work for three contractors with different payment formats.”
• “The lender treated all gross turnover as income.”

These are not one problem. The accountant must first identify the legal borrower, trading structure, payment period, deduction status, labour element, materials, expenses and completed tax record.

What CIS Statements Actually Show

HMRC says a registered subcontractor paid under deduction normally has 20% withheld, an unregistered or unmatched subcontractor can face 30%, and a subcontractor with gross payment status receives payment without CIS tax being withheld. The deduction is an advance payment towards tax and National Insurance or, for a company, relevant liabilities.

The contractor generally starts with the gross invoice payment excluding VAT, then removes qualifying amounts such as materials directly paid for by the subcontractor, certain consumable stores, job fuel, plant hire and manufacture or prefabrication before applying the CIS percentage. Contractors provide payment and deduction statements for months in which deductions are made.

A statement can therefore contain:

• gross payment excluding VAT;
• materials or other qualifying exclusions;
• amount subject to CIS deduction;
• deduction at 20% or 30%;
• net payment; and
• contractor and verification information.

It is not a profit and loss account. It may omit expenses such as vehicles, insurance, tools, administration and subcontract labour, and it does not tell the lender how the applicant extracts income from a limited company.

The CIS Income Reconciliation

The Trading Structure Changes the Mortgage Case

For a limited company, do not submit the company’s gross CIS receipts as the director’s personal earnings. The lender may use salary and dividends, salary plus company profit or another accepted director method, but the case must follow that lender’s genuine policy.

Two Broad Lender Approaches

A lender may use a conventional self-employed approach, assessing completed taxable profit over one, two or more years. Alternatively, a lender with CIS-specific criteria may consider acceptable gross labour receipts from recent statements, often annualised subject to history, consistency and limits.

The accountant should supply accurate facts. Willow identifies the lender whose method best fits those facts. Neither should manipulate the classification solely to maximise borrowing.

Why Materials Need Particular Care

Materials create three separate questions:

1. CIS deduction: were qualifying direct costs correctly excluded before tax was withheld?
2. Accounts: what income and expense should be recorded under the client’s accounting basis?
3. Mortgage: does the lender’s CIS method use gross payments, labour-only amounts or another adjusted figure?

A subcontractor billing £100,000 with £40,000 of materials is not economically equivalent to a labour-only subcontractor receiving £100,000. Yet different statement formats can obscure the difference. Reconcile statements to invoices, bank receipts and ledgers rather than applying a percentage to the visible deposit.

Where the contractor supplied the materials, the subcontractor’s statement and accounts may look different again. The accountant should describe who purchased and bore the cost, not merely repeat a label from a payment statement.

Limited-Company CIS Deductions

HMRC instructs limited-company subcontractors paid under deduction to claim CIS amounts through the company’s monthly payroll reporting, using an Employer Payment Summary, rather than through the Corporation Tax return. Unused deductions can be carried within the tax year and an excess may later be repaid subject to HMRC checks.

For underwriting, this can create:

• a debtor or recoverable balance in company records;
• cash receipts below invoiced turnover;
• PAYE liabilities reduced by CIS credits;
• timing differences between deduction and recovery;
• HMRC queries where contractor statements do not match;
• director drawings affected by company cash flow; and
• confusion if the CIS credit is described as profit.

The accountant should reconcile deductions suffered, payroll claims, HMRC statements and any repayment. A recoverable tax balance may improve expected cash, but it is not recurring trading income.

CIS Mortgage Evidence Pack

Worked Example: £96,000 Statements, £58,000 Taxable Profit

A sole-trader electrician has twelve months of CIS statements showing £96,000 gross payments, £12,000 of materials and £16,800 deducted. Net contractor payments total £79,200. Other allowable business costs bring the accountant-prepared taxable profit to £58,000.

A lender using standard self-employed rules may assess the £58,000 profit, potentially averaged with an earlier year. A lender with suitable CIS criteria may consider an adjusted recent receipt figure under its own method. It should not simply use £96,000 as profit, £79,200 as gross income or subtract the £16,800 again as an expense.

The accountant provides statements, accounts, tax calculations and a bridge from £96,000 to £58,000. Willow tests lenders before application and confirms exactly how materials, history and current receipts will be treated. The client’s tax provision and other commitments remain part of affordability.

The example is illustrative. It shows why a valid CIS-specific method and a valid taxable-profit method can produce different figures without either changing the underlying records.

New to CIS or Recently Granted Gross Payment Status

A recent change needs a timeline:

• last PAYE employment date and trade;
• first subcontract invoice and payment;
• CIS registration and verification status;
• contractors and expected continuity;
• whether tools, vehicle and insurance costs changed;
• current receipts compared with prior earnings;
• gross-payment effective date if applicable;
• tax reserved once withholding stops; and
• first accounts or return due date.

Gross payment status improves immediate cash flow because contractors stop withholding CIS, but the subcontractor remains responsible for tax. A higher bank credit after the change is not a pay rise. The accountant’s forecast should reserve the liability and the mortgage case should compare consistent gross figures.

Where the Professional Boundaries Sit

The accountant determines turnover, expenses, taxable profit, tax treatment and CIS reconciliation. The client and contractor are responsible for accurate contractual and payment information, with HMRC determining scheme status.

Willow identifies lenders that accept the client’s trading structure and evidence, recommends suitable finance and coordinates underwriting. The lender chooses whether it uses taxable profit, a CIS-specific calculation or director income.

Willow does not decide employment status, allowable expenses or tax credits. The accountant should not promise that gross statements will be accepted as mortgage income.

Common Mistakes to Avoid

• Using net bank credits as turnover: tax was withheld before receipt.
• Treating CIS deduction as an expense: it is an advance tax payment.
• Calling full invoices personal income: VAT, materials and costs matter.
• Ignoring trading structure: company income belongs to the company.
• Adding a CIS credit to profit: recovery is not recurring revenue.
• Mixing 20%, 30% and gross periods: compare consistent figures.
• Omitting contractor statements: bank deposits do not show the calculation.
• Annualising a short peak period: seasonality and gaps need context.
• Using old tax profit when current receipts fell: disclose the latest trend.
• Ignoring materials: gross payments can overstate labour earnings.
• Assuming gross status means tax-free: future tax still needs funding.
• Applying before selecting the method: lender treatment differs.

When to Involve Willow

Refer the client when:

• CIS statements show stronger current work than the latest tax year;
• bank credits are being mistaken for gross income;
• materials form a substantial part of payments;
• the client recently moved from PAYE to CIS;
• gross payment status has just begun;
• the subcontractor trades through a limited company;
• several contractors or inconsistent statements are involved;
• one year was affected by illness, gaps or a major contract;
• taxable profit and statement income differ materially;
• a high-value loan needs current evidence;
• the accountant wants the lender’s calculation confirmed; or
• a case was declined after the wrong income route was used.

An anonymous outline should include structure, trade, start date, prior employment, statement periods, gross payments, materials, deductions, taxable profit, company income where relevant, requested mortgage and timing.