How Does CIS Work? The Construction Industry Scheme Explained

CIS (the Construction Industry Scheme) is an HMRC system that governs how tax is collected when contractors pay subcontractors in the UK construction industry. Instead of subcontractors handling all their own tax, contractors deduct a percentage from each payment and pass it to HMRC on the subcontractor's behalf. The deducted amount is a credit against the subcontractor's annual tax bill.

If you're a contractor who's just started paying subcontractors, or a subcontractor trying to understand why your payment is lower than your invoice, this is how the scheme works end to end.

Who Does CIS Apply To?

CIS applies to contractors and subcontractors working in the UK construction industry.

You're a contractor under CIS if you pay subcontractors for construction work. This includes most builders, main contractors, house builders, and property developers. Some businesses that aren't typically thought of as "construction" — such as property investment companies that commission significant building work — may also count as contractors.

You're a subcontractor under CIS if you're paid by a contractor for construction work. You could be self-employed, a partnership, or a limited company. If you also hire your own subcontractors, you're both a contractor and a subcontractor under the scheme.

CIS covers most construction work: building and demolition, site preparation, structural alterations, installation of heating, plumbing, lighting, drainage, and similar systems, and civil engineering. It doesn't cover architecture and surveying, scaffolding hire without labour, carpet fitting, or delivery of materials only.

The Three Deduction Rates

When a contractor verifies a subcontractor with HMRC, HMRC tells the contractor which deduction rate to apply:

Status	Rate	Who It Applies To
Registered subcontractor	20%	Registered for CIS with HMRC
Unregistered subcontractor	30%	Not registered — 30% applies automatically
Gross payment status	0%	Approved by HMRC — receives full payment

The 10-percentage-point gap between registered (20%) and unregistered (30%) is significant. On a £5,000 labour payment, that's £500 sitting with HMRC until the subcontractor's next Self Assessment or Corporation Tax return. Registration is free and takes minutes — there's no reason to stay at 30%.

What CIS Deductions Apply To

Deductions apply to the labour portion only — not materials, VAT, plant hire, or consumable stores.

This is where many invoices go wrong. If a subcontractor's invoice shows a single lump sum without separating labour and materials, the contractor may apply CIS to the whole amount. That over-deduction stays with HMRC until the subcontractor's year-end return.

Practical rule: separate labour and materials on every invoice. Keep receipts for materials. The contractor needs to see what's labour to calculate the deduction correctly.

For a step-by-step walkthrough of the calculation — with worked examples at all three rates — see our CIS tax calculator guide.

How Verification Works

Before paying a subcontractor for the first time, a contractor must verify them with HMRC. Verification is how the contractor confirms the subcontractor's registration status and which rate to apply.

The contractor provides the subcontractor's name, UTR (Unique Taxpayer Reference), and National Insurance number (for individuals). HMRC checks their records and responds with the deduction rate.

Verification happens once per subcontractor per two-year window — if the subcontractor has appeared on the contractor's CIS returns in the current or previous two tax years, no re-verification is needed.

If a contractor pays without verifying, they're liable for the correct deduction amount even if they applied the wrong rate. Skipping verification isn't a defence against under-deduction.

How to Register

As a subcontractor: You need a UTR. If you're already registered for Self Assessment, you already have one. Register for CIS online via GOV.UK. Limited companies register using the company UTR.

As a contractor: You must register for CIS before paying your first subcontractor. Register via GOV.UK using your employer PAYE scheme (or register for PAYE at the same time if you don't have one yet).

Both registrations are free and can be done online.

Monthly CIS Returns (Contractors)

Every month, contractors must submit a CIS return to HMRC. The return covers the tax month (6th to the 5th of the following month) and is due by the 19th of the following month.

The return lists every subcontractor paid in that period: their name, UTR, total paid, materials excluded, deduction rate, and amount deducted.

Nil returns: Even if no subcontractors were paid in a month, the contractor must either file a nil return or notify HMRC they're not using subcontractors for a period. Doing neither results in late-filing penalties starting at £100.

Contractors must also give each subcontractor a payment and deduction statement within 14 days of the end of each tax month. This statement shows the payment made and the deduction taken — subcontractors need it to reclaim their deductions at year end.

Payment and Deduction Statements (Subcontractors)

When you're paid under CIS, the contractor must give you a written payment and deduction statement. This document shows:

• The gross amount of the payment
• The amount of any qualifying materials included
• The amount of the CIS deduction taken

Keep these. You need them to reclaim your deductions when you file your tax return. Without them, you're working from memory or bank statements, and reconciling CIS credits becomes significantly harder.

How Subcontractors Reclaim Deductions

CIS deductions are not an extra tax — they're advance payments towards your tax bill. At year end, you reclaim them through your tax return:

Sole traders and partnerships: Declare your full income (before deductions) on Self Assessment. Enter the total CIS deductions separately. HMRC offsets the deductions against your tax and NI bill. If more was deducted than you owe, you get a refund — though refunds can take months.

Limited companies: Offset CIS deductions against PAYE liabilities through monthly submissions. If no employees, reclaim via Corporation Tax return.

Gross Payment Status

Gross payment status allows a subcontractor to receive the full payment without any deduction. HMRC grants it only to businesses that pass three tests:

1. Business test — you must be running a genuine construction business
2. Turnover test — annual net turnover (excluding materials) must be at least £30,000 for sole traders. For partnerships and companies it is £30,000 per partner or "relevant person" (a director, plus anyone holding shares beneficially in a close company), capped at £100,000 — a cap, not a minimum, so a one-director company whose director is also the only shareholder needs £30,000, not £100,000. Finance Act 2004, Schedule 11 paragraph 11(2) sets it as "whichever is the smaller of" the two
3. Compliance test — all tax returns and payments must be up to date for the previous 12 months

HMRC reviews gross payment status annually. A late Self Assessment return or overdue VAT payment can trigger removal.

What This Means for Your Invoices

If you're a subcontractor:

• Include your UTR on every invoice — without it, the 30% rate applies
• Separate labour from materials on every invoice — with receipts for materials
• If VAT-registered and invoicing a VAT-registered contractor under CIS, the domestic reverse charge likely applies — don't add VAT, the contractor accounts for it

For guidance on structuring your invoices correctly as a self-employed tradesperson or sole trader, see our self employed invoice template guide.

If you want to check the exact deduction amount before you send an invoice, use the CIS Deduction Calculator.

This is general guidance on how CIS works, not tax advice. Consult a qualified accountant or HMRC for your specific circumstances.

Sources

• Construction Industry Scheme (CIS) — GOV.UK
• What you must do as a CIS contractor — GOV.UK
• What you must do as a CIS subcontractor — GOV.UK
• How to register as a CIS subcontractor — GOV.UK