The Construction Industry Scheme Explained
The Construction Industry Scheme (CIS) is a tax deduction scheme that applies to payments made by contractors to subcontractors in the UK construction industry. Under CIS, contractors must deduct money from subcontractor payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance liability.
CIS is governed by the Finance Act 2004 (sections 57–77) and the Income Tax (Construction Industry Scheme) Regulations 2005.
Who Does CIS Apply To?
Contractors
A contractor under CIS is not just a construction company. You are a contractor if you:
- Pay subcontractors for construction work and your annual construction spending exceeds £3 million, even if your main business is not construction
- Are a construction company of any size that pays subcontractors
This means large non-construction organisations such as housing associations, local authorities, and government departments can also be contractors under CIS.
Subcontractors
A subcontractor is any individual or business that carries out construction work for a contractor. This includes:
- Sole traders
- Partnerships
- Limited companies
- Labour agencies supplying construction workers
A business can be both a contractor and a subcontractor if it receives payments from a main contractor and makes payments to its own subcontractors.
What Is Construction Work?
CIS covers a broad range of construction operations, including:
- Building and civil engineering work
- Alterations, repairs, extensions, and demolition
- Installation of heating, lighting, power, water, and ventilation systems
- Internal and external cleaning of buildings during construction
- Painting and decorating
- Site preparation (including excavation and laying foundations)
- Dismantling scaffolding
Work Not Covered by CIS
- Architecture, surveying, and project management (professional services)
- Delivering materials
- Manufacturing materials and components off-site
- Installing burglar alarms, CCTV, or public address systems
- Installing seating in venues
- Work on oil and gas extraction
Registration
Contractor Registration
All contractors must register with HMRC for CIS before they take on their first subcontractor. Registration is done online or by phone.
Subcontractor Registration
Subcontractors do not have to register, but it is strongly recommended. The deduction rate depends on registration status:
| Registration Status | Deduction Rate |
|---|---|
| Registered | 20% |
| Not registered | 30% |
| Gross payment status | 0% |
Unregistered subcontractors lose 30% of their payments to HMRC, making registration essential to manage cash flow.
Gross Payment Status
Subcontractors can apply for gross payment status, meaning no deductions are made from their payments. To qualify, the subcontractor must demonstrate:
- A turnover above a minimum threshold (£30,000 for individuals, scaled for partnerships and companies)
- Compliance with all tax obligations for the previous 12 months (tax returns filed on time, tax paid on time)
- The business is carried on in the UK through a bank account
HMRC reviews gross payment status annually and can withdraw it if the subcontractor falls out of compliance.
How CIS Deductions Work
The process for each payment to a subcontractor:
- Verify the subcontractor with HMRC (online or by phone)
- HMRC confirms the subcontractor’s registration status and applicable deduction rate
- Calculate the deduction based on the labour element of the payment
- Make the deduction and pay the net amount to the subcontractor
- Report the deduction to HMRC through a monthly CIS return
- Pay the deductions to HMRC
What Is Deducted
CIS deductions apply to the labour element of payments. The cost of materials provided by the subcontractor is excluded from the deduction, provided the subcontractor has paid for them.
| Payment Component | Subject to CIS? |
|---|---|
| Labour costs | Yes |
| Materials supplied by subcontractor | No |
| Equipment hire by subcontractor | No (but only if separately identified) |
| VAT | No (deductions are calculated before VAT) |
Example
A subcontractor invoices £5,000 for labour and £2,000 for materials:
| Item | Amount |
|---|---|
| Total invoice (excluding VAT) | £7,000 |
| Deductible amount (labour only) | £5,000 |
| CIS deduction at 20% | £1,000 |
| Payment to subcontractor | £6,000 |
| Plus VAT if applicable | As per invoice |
Monthly Returns
Contractors must submit a CIS monthly return to HMRC by the 19th of each month following the tax month (which runs from the 6th to the 5th). The return must include:
- Details of all subcontractors paid during the month
- Gross amount paid to each subcontractor
- Amount of materials deducted
- CIS deductions made
- A declaration that the subcontractors were verified
If no subcontractors were paid in a month, a nil return must still be submitted.
Payment to HMRC
CIS deductions must be paid to HMRC by:
- 22nd of each month (electronic payment)
- 19th of each month (postal payment)
These are offset against the contractor’s PAYE liability if the contractor also operates PAYE.
CIS for Subcontractors
Reclaiming Deductions
CIS deductions are not a final tax — they are payments on account. Subcontractors reclaim CIS deductions through:
- Self-assessment — sole traders and partners offset CIS deductions against their income tax and NIC liability
- Corporation tax — limited companies offset CIS deductions against their corporation tax, PAYE, and NIC liabilities
- In-year repayment — companies can claim repayment of excess CIS deductions from HMRC before the year end
Record Keeping
Subcontractors should keep:
- All payment and deduction statements received from contractors
- Records of materials costs claimed as deductions
- Invoices and receipts supporting material claims
- Records of income and allowable expenses
CIS and Employment Status
CIS applies to subcontractors, not employees. However, HMRC may challenge the classification if a worker is treated as a subcontractor but is actually an employee under employment law. The same tests used for IR35 apply — control, substitution, and mutuality of obligation.
If HMRC reclassifies a subcontractor as an employee, the contractor becomes liable for PAYE and employer NICs on all payments made.
Penalties
CIS has its own penalty regime:
| Offence | Penalty |
|---|---|
| Late CIS return (1 day) | £100 |
| Late CIS return (2 months) | Additional £200 |
| Late CIS return (6 months) | £300 or 5% of deductions (whichever is higher) |
| Late CIS return (12 months) | £300 or 5% of deductions (whichever is higher) |
| Incorrect return | Penalty based on behaviour |
| Failure to verify subcontractors | Recovery of deductions at higher rate |
CIS and VAT
CIS and VAT interact through the domestic reverse charge for construction services. Since March 2021, the VAT domestic reverse charge requires the customer (contractor) rather than the supplier (subcontractor) to account for VAT on certain construction services.
The reverse charge applies when:
- Both parties are VAT-registered
- The services are reported under CIS
- The customer is not an end user or intermediary
This means subcontractors subject to the reverse charge do not charge VAT on their invoices — the contractor self-accounts for the VAT.
Maintaining accurate financial records is particularly important in construction given the interaction between CIS, VAT reverse charge, and employment status considerations.