The Construction Industry Scheme (CIS) is a tax deduction system that requires contractors in the construction industry to deduct tax at source from payments made to subcontractors for construction work. CIS operates alongside PAYE payroll but uses a separate reporting and deduction mechanism. For a broader overview of the scheme’s scope and registration, see the Construction Industry Scheme guide.
How CIS Deductions Work
When a contractor pays a subcontractor for construction work, the contractor must:
- Verify the subcontractor with HMRC
- Deduct tax at the appropriate rate from the labour element of the payment
- Pay the deduction to HMRC
- Submit a monthly CIS return to HMRC
CIS Deduction Rates
| Subcontractor Status | Deduction Rate |
|---|---|
| Registered (verified with HMRC) | 20% |
| Not registered | 30% |
| Gross payment status (approved by HMRC) | 0% |
Deductions are made from the labour portion of the payment. Payments for materials that the subcontractor has purchased are not subject to CIS deductions, provided the contractor has evidence of the materials cost.
What Counts as Construction Work
CIS covers a wide range of construction operations:
- Building and construction of structures
- Alterations, repairs and decorating
- Demolition and dismantling
- Installation of heating, lighting, drainage and ventilation systems
- Road building and civil engineering
- Site preparation and landscaping connected to construction
It does not cover architecture, surveying, plant hire without an operator, or the manufacture and delivery of materials.
Verifying Subcontractors
Before making the first payment to a subcontractor (and at the start of each tax year), the contractor must verify the subcontractor with HMRC. This can be done:
- Online through the HMRC CIS service
- By phone on the CIS helpline
HMRC will confirm the subcontractor’s:
- Registration status (registered, not registered or gross payment status)
- Applicable deduction rate
- Verification number (to be recorded for compliance)
Verification Failures
If the subcontractor cannot be verified — for example, if they provide incorrect details — the contractor must apply the 30% deduction rate until the issue is resolved.
CIS Payment and Deduction Statements
Paying Subcontractors
When making a payment, the contractor calculates:
| Element | Treatment |
|---|---|
| Total payment | Full invoice amount (excl. VAT) |
| Less: Materials | Deducted from total to find the labour element |
| Labour element | Amount subject to CIS deduction |
| CIS deduction | 20% or 30% of the labour element |
| Net payment to subcontractor | Total payment minus CIS deduction |
Example
A subcontractor invoices £5,000 for a job, comprising £3,500 labour and £1,500 materials. The subcontractor is registered (20% rate):
| Component | Amount |
|---|---|
| Total invoice (excl. VAT) | £5,000 |
| Materials | £1,500 |
| Labour subject to CIS | £3,500 |
| CIS deduction (20%) | £700 |
| Net payment to subcontractor | £4,300 |
| CIS deduction paid to HMRC | £700 |
The contractor must give the subcontractor a written statement showing the gross payment, materials, CIS deduction and net payment within 14 days of the end of each tax month.
Monthly CIS Returns
Contractors must submit a monthly CIS return to HMRC by the 19th of each month following the tax month (which runs from the 6th of one month to the 5th of the next). The return includes:
- Details of all subcontractors paid during the period
- Gross amounts paid (labour and materials separately)
- CIS deductions made
- A declaration that the employment status of each subcontractor has been considered
Nil Returns
If no payments were made to subcontractors in a tax month, the contractor must still submit a nil return or inform HMRC that no return is due for that period (an inactivity request).
Late Filing Penalties
| Delay | Penalty |
|---|---|
| 1 day late | £100 |
| 2 months late | £200 |
| 6 months late | £300 or 5% of the CIS deductions on the return (whichever is greater) |
| 12 months late | £300 or 5% (or up to 100% if information deliberately withheld) |
CIS and PAYE Interaction
Contractors Who Are Also Employers
Many construction businesses operate both PAYE (for their employed workforce) and CIS (for subcontractors). The two schemes run in parallel:
| Scheme | Applies To | Deduction | Reporting |
|---|---|---|---|
| PAYE | Employees | Income tax + NICs | RTI (FPS/EPS) |
| CIS | Subcontractors | CIS deduction (20% or 30%) | Monthly CIS return |
CIS deductions are paid to HMRC alongside PAYE liabilities, on the same payment schedule (by the 22nd of the month electronically or the 19th by cheque). The payments can be made together through the same HMRC account.
Subcontractors Who Are Also Employers
A subcontractor who employs their own staff and operates PAYE can offset CIS deductions suffered against their own PAYE liabilities. This means the CIS tax deducted by the contractor upstream reduces the amount of PAYE and NIC the subcontractor owes to HMRC for their own employees.
| Month | PAYE/NIC Liability | CIS Deductions Suffered | Net Payment to HMRC |
|---|---|---|---|
| Month 1 | £3,000 | £700 | £2,300 |
| Month 2 | £3,000 | £1,200 | £1,800 |
| Month 3 | £3,000 | £3,500 | £0 (£500 carried forward) |
If the CIS deductions exceed the PAYE liability over the tax year, the subcontractor can claim a repayment from HMRC.
Employment Status in CIS
A critical aspect of CIS is determining whether individuals are genuinely self-employed subcontractors or should be treated as employees on PAYE payroll. HMRC uses the standard employment status tests:
- Control — does the contractor dictate how, when and where the work is done?
- Substitution — can the worker send a substitute?
- Mutuality of obligation — is there an obligation to provide and accept work?
Getting this wrong can result in HMRC reclassifying subcontractors as employees, with retrospective PAYE, NICs, penalties and interest.
Record-Keeping
Contractors must retain CIS records for at least 3 years after the end of the tax year, including:
- Subcontractor verification details and HMRC responses
- Payment records showing gross amounts, materials and deductions
- Copies of all CIS deduction statements issued
- Monthly CIS returns submitted
- Evidence of materials costs (invoices from subcontractors)