If you work in construction, whether as a contractor hiring others or a subcontractor doing the work, the Construction Industry Scheme (CIS) almost certainly affects you. It changes how payments are made between businesses in the building trade, with tax taken off at source and passed to HMRC. Understanding it keeps you on the right side of the rules and stops you paying more tax than you need to.
This guide explains what CIS is, who it applies to, how deductions work, and what you need to do month to month, in plain English.
This article is general information only and is not financial advice. Tax rules can change, so always confirm the details that apply to you on GOV.UK or speak to a qualified accountant.
What CIS is and who it applies to
The Construction Industry Scheme is a set of rules for how payments for construction work are handled for tax purposes. Under it, contractors deduct money from a subcontractor's payments and pass it to HMRC. Those deductions count as advance payments towards the subcontractor's tax and National Insurance.
It covers most construction work in the UK, including building, alterations, repairs, demolition and installation. There are some exceptions, such as certain professional or purely supplementary services, so if you are unsure whether your work falls under it, check the scope on GOV.UK.
CIS applies to a wide range of businesses, from sole traders to limited companies. If you are a sole trader in the trade, it also pays to understand which costs you can claim, which our guide to allowable business expenses for sole traders covers in detail.
Contractors versus subcontractors
The scheme splits businesses into two roles, and you can be both at the same time. Getting clear on which you are decides what you have to do.
- Contractors pay subcontractors for construction work. This includes mainstream construction businesses, and also some other organisations that spend a lot on construction even if it is not their main trade. Contractors must register for CIS, verify subcontractors, make deductions and file returns.
- Subcontractors carry out construction work for contractors. They should register too, because registered subcontractors usually have a lower rate deducted than unregistered ones.
Plenty of businesses are both. A subcontractor who hires others to help becomes a contractor in respect of those payments. If that is you, you carry the duties of both roles, so it is worth setting up your systems carefully from the start.
Registration and verification
If you are a contractor, you must register for CIS before you take on and pay subcontractors. Subcontractors should register too, even though it is not always strictly compulsory, because the deduction rate is lower for those who are registered and verified.
Before paying a new subcontractor, a contractor must verify them with HMRC. Verification confirms whether the subcontractor is registered and, crucially, which deduction rate applies to them. The basic flow looks like this:
- The contractor registers for CIS as an employer or contractor.
- The subcontractor registers as a subcontractor under the scheme.
- Before the first payment, the contractor verifies the subcontractor with HMRC.
- HMRC confirms the correct deduction rate to apply.
- The contractor deducts at that rate and pays the balance to the subcontractor.
Keep a record of every verification, because it determines how much you deduct and you may need to show your working.
How deductions work
This is the heart of the scheme. When a contractor pays a subcontractor, they generally deduct a percentage from the labour element of the payment and send it to HMRC. The deduction is taken before the subcontractor is paid, and it counts towards the subcontractor's eventual tax bill.
There are broadly three positions a subcontractor can be in:
- Gross payment status: some subcontractors qualify to be paid in full with no deduction, settling their tax later through their own return. This has to be applied for and conditions apply.
- Standard rate: the usual deduction for registered, verified subcontractors.
- Higher rate: a larger deduction for subcontractors who are not registered or cannot be verified.
The exact percentages change over time, so do not rely on figures from memory or an old article. Always confirm the current rates on GOV.UK. Note too that deductions usually apply to labour, not to materials, which are typically excluded from the calculation.
Monthly returns and payments
If you are a contractor, CIS brings a monthly rhythm. Each month you must send HMRC a return showing the payments you made to subcontractors and the deductions you took, and you must pay those deductions over to HMRC. You also give each subcontractor a statement showing what was deducted, which they need for their own records.
Deadlines and penalties for late returns are strict, so build the routine into your monthly admin and do not let it slip. The discipline is similar to running payroll, and if you also have employees, our guide to PAYE payroll basics for small employers sits naturally alongside your CIS duties. Confirm the current filing dates and penalty rules on GOV.UK.
Reclaiming deductions and keeping records
For subcontractors, the deductions taken are not lost money, they are payments on account towards your tax. How you recover or offset them depends on your business structure.
If you are a sole trader, the deductions taken across the year are set against your tax bill when you complete your Self Assessment return, and if too much has been deducted you can be due a refund. This makes your annual return and its deadlines especially important, which our guide to Self Assessment deadlines and penalties explains. Limited companies typically offset CIS deductions against other amounts they owe HMRC through their payroll process instead.
Either way, good records are essential. Keep your CIS statements, invoices showing the split between labour and materials, verification records and payment details. Without them, proving how much was deducted and reclaiming it correctly becomes far harder.
Under CIS the tax is taken at source, so the subcontractor who keeps every statement is the one who reclaims every penny they are owed.
Frequently asked questions
Do I have to register if I am only a subcontractor?
Registration is not always strictly compulsory for subcontractors, but it is strongly in your interest. Registered and verified subcontractors usually have a lower rate deducted than those who are not, which means more cash in hand as you go. Confirm the current rates and process on GOV.UK.
Are materials included in the deduction?
Generally, deductions are calculated on the labour part of a payment, not on the cost of materials, provided the materials are genuine and properly evidenced. This is why splitting labour and materials clearly on your invoices matters, since it can affect how much is deducted. Always check the current rules to be sure you are applying them correctly.
What happens if I am both a contractor and a subcontractor?
This is common, and it means you carry both sets of duties. As a contractor you verify, deduct, file monthly returns and pay HMRC. As a subcontractor you have deductions taken from payments made to you, which you later reclaim or offset. Keeping the two roles clearly separated in your records makes everything far easier at year end.
CIS is one of those schemes that runs smoothly once your systems are set up, and causes headaches when they are not. For more straightforward guidance on tax and running a construction business, join our newsletter and get practical updates in plain English.
