What Is the Construction Industry Scheme?
The Construction Industry Scheme, almost always shortened to CIS, is a set of HMRC rules that change the way tax is collected on construction work. Under CIS, a contractor who pays a subcontractor for building work does not hand over the full amount. Instead the contractor takes a slice off the payment and sends it straight to HMRC as an advance towards the subcontractor's tax and National Insurance.
That is the whole idea in one sentence. Money that would normally reach the subcontractor and be taxed later, through Self Assessment or the company's own return, is taxed at source instead. HMRC brought the scheme in because the construction trade has always had a lot of cash, a lot of short engagements and a lot of movement between jobs, which made it easy for tax to go unpaid. CIS is HMRC's way of collecting some of that tax before the money ever changes hands.
If you run a building firm, take on labour, or work as a subcontractor yourself, CIS affects how much you get paid and what you have to report. It is one of the most misunderstood parts of the UK tax system, partly because the name makes it sound like a niche scheme when in practice it touches almost everyone in the trade.
Who CIS Applies To
CIS splits everyone into two roles, and it is common to be both at once.
A contractor is anyone who pays subcontractors for construction work. This includes the obvious cases, builders and developers, but it also catches businesses you might not expect. A firm that is not in construction at all becomes a deemed contractor once its spending on construction work goes over £3 million in any rolling 12 month period. That threshold, in place since April 2021, pulls in large property owners, retailers and manufacturers who happen to spend heavily on building work.
A subcontractor is anyone who does construction work for a contractor and gets paid for it. A self employed bricklayer, a limited company doing groundworks, a labour agency supplying workers, all are subcontractors under CIS.
The reason so many businesses are both is that construction work is layered. A main contractor takes on a job, then subcontracts parts of it to specialist firms, who in turn take on their own labour. Each firm in that chain is a subcontractor to the one above and a contractor to the ones below, so it deducts CIS on the way down and has CIS deducted on the way up.
The scheme covers most construction work in the UK: site preparation, demolition, building, alterations, repairs, decorating and installing systems for heating, lighting, power, water and ventilation. A few things sit outside it, including architecture and surveying, scaffolding hire with no labour, carpet fitting and simply delivering materials.
How CIS Works in Practice
The mechanics are best seen through a single payment. Say a contractor owes a subcontractor £5,000 for labour plus £1,000 for materials, so £6,000 in total. CIS is only ever deducted from the labour element, never from materials, VAT or plant hire. So the contractor works out the deduction on the £5,000 of labour, not the full £6,000.
At the standard registered rate of 20 percent, the deduction is £1,000. The subcontractor is paid £5,000 minus £1,000, plus the £1,000 of materials in full, which comes to £5,000 in the hand. The £1,000 that was withheld goes to HMRC, and the subcontractor gets a statement showing exactly what was taken.
That deduction is not a final tax. It is a payment on account of the subcontractor's eventual bill, much like the payments on account that catch out the self employed elsewhere in the tax system. When the subcontractor works out their real tax for the year, the CIS already deducted is set against it. Very often, because the 20 percent has been taken off turnover rather than profit, too much has been withheld and a refund is due. More on that below.
Before a contractor can pay a new subcontractor, they must verify them with HMRC. Verification tells the contractor which deduction rate to use, and it is the step that decides whether 20 or 30 percent comes off.
The CIS Deduction Rates: 20, 30 and 0 Percent
There are three possible rates, and which one applies comes down to registration.
- 20 percent is the standard rate for subcontractors who are registered with HMRC under CIS. This is what most subcontractors pay.
- 30 percent is the higher rate, applied to subcontractors who are not registered, or who cannot be verified. It is a penalty rate in all but name, designed to push people into registering.
- 0 percent applies to subcontractors who hold gross payment status, meaning they are paid in full with nothing deducted and settle their own tax later.
The gap between 20 and 30 percent is the single biggest reason to register. On a £5,000 labour payment, registering saves £500 in cash withheld every single time. That money does come back eventually if too much has been taken, but waiting a year for a refund is a real cost to a business that needs the cash now. Registering as a subcontractor is quick and free, and it is one of the first things we sort out for anyone starting in the trade.
Gross Payment Status
Gross payment status is the prize at the top of the scheme. A subcontractor with gross status receives the whole payment, labour and all, with no CIS deduction, and instead pays their tax in the normal way through their company or Self Assessment return. For a business with tight margins and high turnover, keeping hold of that cash through the year rather than lending it to HMRC interest free makes a genuine difference to cash flow.
It is not handed out freely. To qualify, a business has to pass three tests:
- The business test. You must show you run a genuine construction business in the UK with a bank account.
- The turnover test. Your net construction turnover, excluding VAT and materials, must be at least £30,000 for a sole trader, or £30,000 for each partner or director, subject to an alternative £100,000 whole business threshold.
- The compliance test. You must have filed returns and paid your tax on time. Since April 2024 this test also looks at your VAT record, so a poor VAT history can now cost you gross status.
HMRC reviews gross payment status regularly and can withdraw it if you slip on your filing or payments, which is a strong reason to keep every deadline. Losing it drops you back to 20 percent deductions overnight and can unsettle the contractors who rely on paying you gross.
What Contractors Have to Do
Being a contractor under CIS carries real administrative weight, and HMRC treats the obligations seriously. If you pay subcontractors, you must:
- Register as a contractor with HMRC before you take anyone on. This is separate from registering as an employer for PAYE, though many construction businesses need both.
- Verify each subcontractor before their first payment, to confirm their deduction rate.
- Deduct CIS at the right rate from the labour element of every payment.
- Give each subcontractor a deduction statement within 14 days of the end of the tax month, showing what was paid and what was taken.
- File a monthly CIS return, the CIS300, by the 19th of each month, listing every subcontractor paid and every deduction made.
- Pay the deductions to HMRC, by the 22nd if paying electronically, alongside any PAYE.
The monthly return is where most contractors come unstuck. It is due even in months when no subcontractors were paid, in which case you file a nil return or tell HMRC you expect no activity for a while. Miss it and the penalties start at £100 the day it is late, rising to £200 after two months and climbing from there. Those fixed penalties bite regardless of how much tax was actually due, so a contractor who forgets a single quiet month can still face a bill for nothing more than lateness.
What Subcontractors Have to Do, and How Refunds Work
For subcontractors, CIS is less about admin and more about getting the money back that was withheld. What you have to do depends on how you trade.
If you are a sole trader or partnership, the CIS deducted during the year is set against your Income Tax and Class 4 National Insurance when you file your Self Assessment tax return. Because the 20 percent was taken off your gross labour income before any expenses, tools, materials, fuel, insurance, the amount withheld usually overshoots your real bill by a wide margin. The result is a refund, and for a lot of subcontractors that annual CIS refund is the biggest single cheque of their tax year.
If you trade through a limited company, the treatment is different. You cannot simply claim the CIS back on the company tax return. Instead the deductions suffered are offset against the PAYE, National Insurance and CIS your company owes HMRC as an employer, reported through your payroll each month. If the deductions come to more than those liabilities, the surplus can be repaid or set against corporation tax after the tax year ends. This catches out a lot of new company directors who expect the refund to work the way it did when they were self employed.
Either way, the golden rule is to keep every deduction statement. Those statements are your proof of tax already paid, and without them reclaiming what you are owed becomes a fight. We see subcontractors lose hundreds of pounds simply because a contractor never sent a statement and nobody chased it.
CIS and the VAT Reverse Charge
One rule that trips up almost everyone in construction is the VAT domestic reverse charge, in force since 1 March 2021. It changes who accounts for VAT on most CIS work between VAT registered businesses.
Normally a subcontractor charges VAT on their invoice and the customer pays it, and the subcontractor then hands that VAT to HMRC. Under the reverse charge, for standard and reduced rated construction services supplied to another VAT registered business that is not the end user, the subcontractor does not charge VAT at all. Instead the invoice states that the reverse charge applies, and the customer accounts for both the output and input VAT on their own return.
The point of it, like CIS itself, is to stop VAT being charged, collected and then disappearing before it reaches HMRC. In practice it means subcontractors invoice for the net amount and note the reverse charge on the invoice, while contractors have to handle the VAT accounting at their end. It applies only where CIS applies, only between VAT registered businesses, and only where the customer is not an end user such as a private homeowner or the final occupier. Getting this wrong is one of the most common VAT errors we see in the trade, and it usually shows up as a subcontractor charging VAT they should not have.
Our View
CIS is one of those schemes that looks punishing from the outside and turns out to be manageable once the routine is in place. The design is not unreasonable. Construction has always been a hard sector to tax cleanly, and collecting some of the money at source is a fair enough answer to that.
Where it goes wrong is almost never the concept and almost always the admin. Contractors forget a monthly return in a quiet month and collect a £100 penalty for nothing. Subcontractors let deduction statements pile up unsorted and then cannot prove what was taken. Directors of new limited companies assume the refund works like it did when they were sole traders and are baffled when the cash does not appear. And more than a few subcontractors carry on charging VAT years after the reverse charge came in.
Our honest view is that CIS rewards good habits more than almost any other tax. Register early so you are on 20 percent not 30. Chase every deduction statement and file them somewhere safe. Never miss a monthly return, even a nil one. Protect gross payment status like it matters, because it does. Do those few things consistently and CIS becomes background noise. Ignore them and it becomes a steady drip of penalties and lost cash.
There is also a bigger question sitting underneath the scheme, which is whether a worker is genuinely self employed at all or should really be on the payroll. CIS is not a substitute for getting employment status right, and the same worries about disguised employment that drive IR35 apply in construction too. Labelling someone a CIS subcontractor does not make them one if the working relationship looks like employment.
How IAK Can Help
We look after contractors and subcontractors across North London, and CIS runs through a lot of what we do. For contractors, our bookkeeping and payroll teams verify your subcontractors, calculate the right deductions, produce the statements and file your monthly CIS returns on time, so the penalties never start. For subcontractors, we make sure every deduction is captured, reconciled and reclaimed, whether that is a refund through your Self Assessment or an offset through your company payroll.
We also handle the parts that sit around CIS, the VAT reverse charge on your invoices, the choice between operating as a sole trader or a limited company, and applying for or protecting gross payment status. If CIS deductions are eating your cash flow or you are not sure you are getting back what you are owed, contact us for a free consultation and we will look at where the money is going.
Sources
- Construction Industry Scheme (CIS), GOV.UK, on who counts as a contractor and subcontractor and what work is covered.
- What you must do as a CIS contractor, GOV.UK, on verifying subcontractors, deduction rates, monthly returns and deduction statements.
- What you must do as a CIS subcontractor, GOV.UK, on registering, the 20 and 30 percent rates and reclaiming deductions.
- Get gross payment status, GOV.UK, on the business, turnover and compliance tests for gross payment status.
- VAT domestic reverse charge for building and construction services, GOV.UK, on how the reverse charge works and when it applies.