A Guide to Construction Industry Scheme (CIS) for Subcontractors and Contractors

If you run a construction business or work as a subcontractor, the Construction Industry Scheme (CIS) is not optional reading — it's the tax rule that hits your bottom line every month. CIS is how HMRC ensures contractors deduct tax from subcontractors' payments in advance. For contractors, it means administrative overhead. For subcontractors, it means getting paid less unless you understand how to claim it back. This guide covers what CIS is, who has to follow it, how the deductions work, and the common mistakes that cost money.

What Is CIS, and Why Should You Care?

The Construction Industry Scheme is HMRC's system for collecting tax upfront from construction workers. Here's the simple version: a contractor pays a subcontractor for work. Instead of writing a single cheque, the contractor deducts a percentage (usually 20% or 30%, depending on CIS status) and sends that deduction to HMRC. The subcontractor receives the net amount. Those deductions count as advance payments of the subcontractor's tax bill.

It's a bit like pay-as-you-earn, but for self-employed construction workers.

Why? Because construction has historically high cash flow and high turnover, and HMRC wants the money before the year-end tax return lands on a desk. It's not personal — it's just the industry.

If you are a contractor (someone who hires subcontractors), you must register, verify every subcontractor, make the correct deductions, and file monthly returns. If you are a subcontractor, you need to register to get the lower 20% deduction rate (not 30%), and you need to claim those deductions back on your tax return. Mess this up, and you'll either overpay tax or face penalties from HMRC. Get it right, and it's just a routine monthly task.

Who Falls Under CIS?

Contractors

A "contractor" in CIS terms is anyone who:

Pays subcontractors for construction work and spends more than £3 million on construction in a rolling 3-year period, OR
Carries out construction work as part of your main business

This includes obvious ones: construction companies and property developers. But it also catches housing associations, local authorities, and even businesses outside construction (like a retail chain building a new store) if they cross the £3 million threshold. These are called "deemed contractors," and they are bound by CIS even though they are not construction companies.

Subcontractors

You are a subcontractor under CIS if you do construction work for a contractor (as a sole trader, partner, or limited company) and get paid for construction operations. No registration is required to be a subcontractor, but registration gets you a lower deduction rate (20% instead of 30%), which saves money.

What counts as construction work?

CIS covers:

Building and civil engineering
Alterations, repairs, extensions, demolition
Installing systems (heating, electrical, plumbing, water)
Painting and decorating
Landscaping (if part of a construction contract)
Cleaning (as part of construction)

CIS does not cover:

Architecture and surveying (professional services)
Hiring scaffolding without erection
Carpet fitting (a contentious one, but usually not in scope)
Delivery of materials alone
Off-site manufacturing

When in doubt, HMRC's CIS guidance has the definitive list.

The Deduction Rates: 20%, 30%, or Gross

When a contractor pays a subcontractor, the deduction depends on the subcontractor's registration status:

Status	Deduction
Registered for CIS	20%
Not registered for CIS	30%
Gross payment status	0%

Getting gross payment status (0% deductions)

If you are a subcontractor and qualify, you can register for gross payment status — meaning no deductions at all. To qualify, you must:

Be registered with HMRC for CIS
Have a clean tax compliance record (filed returns, paid on time, no arrears)
Meet a minimum turnover threshold (£30,000 for individuals, £30,000 per partner for partnerships, £30,000 per director for companies)

Gross status is reviewed annually by HMRC. Slip on a tax return or miss a payment, and it disappears. For a subcontractor, moving from 30% to 20% or to 0% can be worth thousands per year — it's worth getting registered and checking your eligibility.

How CIS Actually Works: Step by Step

For contractors

Register with HMRC — Before you pay your first subcontractor, register as a CIS contractor. You can do this online in minutes.
Verify the subcontractor — Every time you take on a new subcontractor, verify them with HMRC's CIS online service. This tells you their status: 20%, 30%, or gross. Do not skip this. If you pay without verifying, you should assume 30% deduction, and if you deduct less, you are liable for the difference.
Deduct from labour only — When you pay an invoice, deduct the correct percentage from the labour element only. Materials are not subject to CIS deduction. If a subcontractor invoices £1,000 labour + £500 materials, you deduct from the £1,000 — not the full £1,500. The subcontractor must back that up with evidence of material costs (receipts, invoices from suppliers).
Provide a deduction statement — Give the subcontractor a written statement (or email) showing the gross amount, amount deducted, and net amount paid. This is their record for their tax return.
File a monthly return — By the 19th of each month, file a CIS return with HMRC. This lists every payment and deduction made in the previous tax month.
Pay HMRC — Send the deductions to HMRC by the 19th (or 22nd if paying online).

If you are handling multiple subcontractors, this gets tedious. Accounting software automates the deduction calculation and return filing. If your construction work is complex (multiple cost codes, locations, job types), look at how your accounting system handles CIS — a bad fit will slow you down monthly.

For subcontractors

Register for CIS — Register with HMRC. This gets you the 20% deduction rate instead of 30%. Apply for gross payment status if you qualify.
Invoice correctly — Separate labour and materials on your invoices using the same approach as invoicing for freelance work. Labour is subject to CIS deduction; materials are not (provided you have evidence). If you lump everything together, the contractor will deduct CIS on the full amount, which is wrong — but it becomes your problem to sort out.
Receive payment — The contractor pays you the net amount after deducting CIS. You get a deduction statement.
Claim the deductions on your tax return — This is crucial. When you file your self-assessment tax return or your company's corporation tax return, you offset those CIS deductions against your tax liability. If deductions exceed your tax liability, you claim a refund.

If you do not claim the deductions, you will pay tax twice — once via the deduction, once via your tax bill. This is a common and expensive mistake.

Recording CIS in Your Books

For contractors

In your accounts:

Record the gross payment as an expense (labour and material costs are legitimate business expenses)
Record the CIS deduction as a liability to HMRC
When you pay HMRC, the liability is cleared

If your construction work is complex with multiple jobs and cost tracking, review the specifics of construction accounting to ensure your system captures everything correctly. Most accounting software can automate CIS deduction calculation and return generation, which saves you hours each month.

For subcontractors

In your accounts:

Record the gross amount as income (not just the net amount received)
Record the CIS deduction as a tax prepayment (an asset)
When you file your tax return, offset the deductions and clear the asset

This matters because if you only record the net amount you received, you will understate your income — and then when you offset the deductions, the numbers won't reconcile. You'll end up underpaying tax and facing a surprise bill. If you are unsure about reconciling these properly, read our guide on how to reconcile your bank accounts, which covers the same reconciliation principles.

Common CIS Mistakes (and How to Avoid Them)

Not verifying subcontractors. Contractors must verify before paying. Fail to verify, and you should assume 30% deduction. If you deduct 20% without verification, you are liable for the difference. Verify everyone, every time.

Deducting from materials. CIS applies to labour only. If a subcontractor's invoice clearly separates £800 labour and £200 materials, deduct CIS from the £800. But if everything is lumped together and you do not challenge it, you may deduct from the full amount — leaving the subcontractor short and causing reconciliation headaches later.

Late monthly returns. CIS returns are due by the 19th of each month. HMRC charges £100 per month late, per 50 subcontractors. Set a calendar reminder or automate it via your accounting software.

Subcontractors not claiming deductions. If you are a subcontractor and do not offset your CIS deductions on your tax return, you are essentially paying the tax twice. Always include them.

Mixing up labour and materials on invoices. Subcontractors should clearly separate labour and materials. Vague invoices invite disputes and deductions applied to the wrong portion. Be specific.

Confusing CIS with VAT. CIS and VAT are separate. You may be subject to both. If you are registered for VAT, read up on how to do a VAT return separately — CIS does not replace VAT obligations.

Limited Companies, Deemed Contractors, and CIS

Limited companies as subcontractors

If your limited company acts as a subcontractor, the contractor still deducts CIS unless you have gross payment status. These deductions are offset against your corporation tax liability (or your company's PAYE bill if you take a salary). Your accountant or accounting software will handle the offset when preparing your tax return. The mechanics are the same as for sole traders — just filed via corporation tax instead of self-assessment.

Deemed contractors

Large organisations outside construction can be classed as "deemed contractors" if they spend over £3 million on construction in a rolling 3-year period. This includes local authorities, government departments, and housing associations. If you work as a subcontractor for these organisations, CIS applies — they must verify you, deduct, and file returns just like construction companies. There is no exemption because they are not a "real" construction company.

Frequently Asked Questions

Q: What if a contractor does not deduct CIS from my payment? A: You should question it. If you are registered for CIS, the contractor should be deducting 20% (or 0% if you have gross status). If they deduct nothing and claim they verified you, check with HMRC. If they fail to deduct without justification, you may still owe tax on the full amount when you file your return.

Q: Can I claim a refund if my CIS deductions exceed my tax bill? A: Yes. If the deductions are more than you owe in tax, HMRC will refund the difference (assuming no other tax debts). This is common for subcontractors with lower annual earnings.

Q: Is CIS the same as PAYE? A: No. PAYE is for employees. CIS is for self-employed construction subcontractors. The mechanics are similar (tax deducted upfront), but the rules, rates, and forms are different.

Q: Do I need to register as a subcontractor if I only do occasional construction work? A: If you are paid by a contractor for construction work, you fall under CIS — even if it is occasional. You should register to get the 20% rate instead of 30%. There is no minimum work threshold.

Q: What happens if a contractor and I disagree about what counts as labour vs. materials? A: Agree it on the invoice before payment. If the contractor deducts CIS on what you both agreed were materials, it is a dispute. Document your conversation and contact HMRC if you cannot resolve it.

Q: How do I know if I qualify for gross payment status? A: You must meet three tests: registered for CIS, clean tax record (filed returns, paid on time), and turnover above the minimum threshold (£30,000 for individuals). HMRC will tell you if you qualify when you apply.

Q: Can I register for CIS online? A: Yes. Both contractors and subcontractors can register and verify online via HMRC's CIS pages.

Q: Does CIS apply if I am a director of a limited company doing construction work? A: If your limited company is a subcontractor, yes — CIS applies to the company's payments (unless you have gross status). If you work as an employee of your own company, PAYE applies instead. If you mix both, your accountant needs to separate the two.

The Bottom Line

CIS is mandatory for construction. For contractors, it is an administrative task that requires discipline (verify everyone, deduct correctly, file monthly). For subcontractors, it is a tax prepayment that you must track and claim back.

Set up the process correctly from the start: good invoicing habits, accurate labour/material separation, monthly filing, and accounting software that understands CIS. If your construction business is more than a side job, get an accountant who knows the scheme — it is worth the cost to avoid overpayment and penalties.

You cannot avoid CIS, but you can make it routine rather than a source of friction and overpaid tax.