Upon a contractor issuing work to a subcontractor, the contractor will check whether the subcontractor is CIS registered. At this point, the contractor finds out what level of registration the subcontractor has.
When a subcontractor invoices the contractor, a percentage of the labour (does not apply to materials) is deducted before paying the remainder of the invoice. This is typically 20%. The contractor pays the amount deducted to HMRC on a monthly basis.
At the end of the year, any tax paid by the subcontractor in this manner, is deducted from the amount paid through Self Assessment, as is has been “deducted at source”.