The Construction Industry Scheme (CIS) is HMRC’s mechanism for collecting tax at source from subcontractors in the UK construction industry. If you are a contractor, you must verify, deduct and report. If you are a subcontractor, your cash flow can swing wildly depending on whether you are at gross, standard or higher rate. This guide explains both sides and the monthly compliance routine, and forms part of our UK industry accounting guides for sector-specific bookkeeping.
Who is a contractor and who is a subcontractor
| Role | Definition |
|---|---|
| Mainstream contractor | Business whose main trade is construction and pays subcontractors |
| Deemed contractor | Non-construction business that spends an average of more than £3 million on construction work over 12 months |
| Subcontractor | Business or individual carrying out construction work for a contractor |
A business can be both contractor and subcontractor on the same project. CIS applies to UK construction operations, including site preparation, demolition, alterations, dismantling, decoration and installation of fixtures.
Deduction rates
| Status | Deduction from labour element |
|---|---|
| Gross payment | 0% |
| Registered (standard) | 20% |
| Unregistered (higher) | 30% |
The deduction is taken from the labour portion of the invoice only. Materials, plant hire (without operator), VAT and CIS-exempt supplies are excluded.
Monthly contractor obligations
Each tax month (running 6th to 5th of the next month) a contractor must:
- Verify every new subcontractor through HMRC’s CIS Online service
- Deduct the correct rate from each labour payment
- Pay the net amount to the subcontractor
- File the CIS300 monthly return by the 19th of the following month
- Pay the deductions to HMRC by the 22nd (electronic) or 19th (cheque)
- Issue payment and deduction statements to subcontractors within 14 days of month end
Nil returns are required if you have no subcontractor activity in the month and have not formally declared inactivity.
Subcontractor cash flow
A registered subcontractor invoicing £1,000 + £200 VAT for labour-only work receives:
| Element | Amount |
|---|---|
| Labour | £1,000 |
| Less 20% CIS deduction | (£200) |
| VAT | £200 |
| Net cash from contractor | £1,000 |
The £200 deduction is credited against the subcontractor’s eventual income tax (sole trader/partnership) or corporation tax/PAYE (limited company) bill. Many small subcontractors end the year with a refund.
Gross payment status
A subcontractor can apply for gross payment status by passing three tests:
- Business test - genuine UK construction business
- Turnover test - net construction turnover above £30,000 per partner/director (or £100,000 group total)
- Compliance test - all tax and NIC filings up to date for 12 months
Gross status is reviewed annually and can be withdrawn for late filing or payment. For the wider picture on running the books in this sector, read our guide to accounting for construction and trades, which covers job costing alongside CIS. See also our existing construction industry scheme and CIS payroll pages.
CIS and the VAT reverse charge
Since March 2021 the VAT domestic reverse charge for construction applies to most CIS-registered B2B supplies. The customer accounts for the VAT, the supplier issues a reverse-charge invoice, and the supplier’s VAT return shows nil output VAT on these sales. Read VAT reverse charge for the mechanics.
Common CIS pitfalls
- Failing to verify subcontractors and applying 20% to someone HMRC has flagged for 30%
- Treating an obvious employee as a subcontractor (employment status enquiries)
- Forgetting nil returns and incurring £100 fixed penalties
- Not separating labour from materials on invoices, leading to over-deduction
- Missing the gross payment status renewal review
Wrap-up
CIS is unforgiving on dates but rewards clean process. Run the verification and monthly returns through the same software you use for VAT bookkeeping and the workflow becomes routine. The HMRC CIS guidance is the authoritative reference.
Our partners can operate CIS returns and payroll for you through accounting help.