The Construction Industry Scheme (CIS) is one of those areas where people tend to learn just enough to get by, then muddle through the rest.
Many subcontractors have had tax deducted under CIS without fully understanding why, how much, or what happens to that money afterwards.
This guide explains CIS from the ground up – what it is, who needs to register, how deductions work, and what you need to do each month and each year to stay on the right side of HMRC.
What Is the Construction Industry Scheme?
CIS is a tax collection system that applies specifically to the construction industry.
Under the scheme, contractors deduct tax from payments made to subcontractors and pass those deductions to HMRC. The deductions count as advance payments towards the subcontractor’s income tax and National Insurance – so it’s not extra tax, it’s tax paid early.
HMRC introduced the scheme because construction has historically relied heavily on self-employed labour, and tax collection through self-assessment alone wasn’t capturing enough revenue. CIS ensures that tax is collected throughout the year rather than in a single lump sum.
What Does CIS Cover?
The scheme applies to most construction work carried out in the UK. That includes:
- Building, alterations, repairs, extensions, and demolition
- Installation of heating, plumbing, electrical, and ventilation systems
- Painting, decorating, and civil engineering work (roads, bridges, etc.)
- Site preparation, cleaning, and landscaping as part of a construction project
It does not cover architecture, surveying, scaffolding hire without labour, or the delivery of materials on their own. The full list of what’s in and out of scope is set out in HMRC’s CIS guidance (CIS 340).
Contractor or Subcontractor – Which Are You?
This distinction matters because your obligations under CIS depend entirely on which side of the relationship you’re on. Many construction businesses are actually both.
- A contractor is a business that pays subcontractors for construction work. You’re classed as a contractor if your business operates in construction and you hire subcontractors, or if you’re a non-construction business that has spent more than £3 million on construction work in a rolling 12-month period (these are called “deemed contractors”).
- A subcontractor is a business or individual that carries out construction work for a contractor. This includes sole traders, partnerships, and limited companies. If you’re a self-employed electrician working on a building site for a main contractor, you’re a subcontractor under CIS.
If your business hires subcontractors for some jobs and works as a subcontractor on others, you’ll have obligations on both sides. That’s common in construction – a specialist firm might subcontract work from a main contractor while also hiring its own subcontractors for parts of the job.
Registration: Who Needs to Do What
Contractors must register for CIS. This is a legal requirement. You cannot pay subcontractors for construction work without being registered. You can register online through your HMRC Government Gateway account, and you’ll need to be registered as an employer first.
Subcontractors don’t have to register, but they should. The deduction rate for an unregistered subcontractor is 30%. If you register, that drops to 20%. And if you qualify for gross payment status, it drops to 0%.
To register as a subcontractor, you’ll need your National Insurance number (or company UTR), your legal business name, and your business address. The process is done through HMRC either online or by phone.
How CIS Deductions Work
Once a contractor is registered and has verified a subcontractor’s status with HMRC, they need to apply the correct deduction rate to each payment. The three rates are:
- 0% (gross payment status) – The subcontractor receives the full payment with no deductions. Only available to those who’ve applied and been approved.
- 20% (registered) – The standard rate for subcontractors who are registered with HMRC under CIS.
- 30% (unregistered) – The higher rate that applies when a subcontractor hasn’t registered.
An important detail: deductions are only made on the labour element of a payment, not on the cost of materials.
If a subcontractor invoices £5,000 for a job – £3,000 for labour and £2,000 for materials – the 20% deduction applies only to the £3,000, not the full amount. VAT is also excluded from the calculation.
After making a deduction, the contractor must provide the subcontractor with a written statement showing the gross payment, the amount deducted, and the cost of materials.
These statements are important – subcontractors need them when reclaiming deductions through their self-assessment tax return (for sole traders and partners) or, for limited companies, through payroll via the Employer Payment Summary (EPS).
Gross Payment Status: Getting Paid Without Deductions
For subcontractors with strong cash flow needs – which is most of them – gross payment status is worth pursuing. It means contractors pay you in full, without any deductions, and you handle your own tax payments directly.
To qualify, you need to pass three tests set by HMRC. These aren’t especially difficult for established businesses, but they do require a clean compliance record:
- Business test – You must carry out construction work in the UK and operate through a bank account.
- Turnover test – Your net construction turnover (excluding VAT and materials) must be at least £30,000 per year for a sole trader, or £30,000 per partner/director for partnerships and companies (with a minimum of £100,000 for the entity overall).
- Compliance test – You must have submitted all tax returns and paid all taxes on time in the 12 months before your application. Since April 2024, this includes VAT obligations too.
HMRC reviews gross payment status annually, and they can withdraw it if your compliance slips. HMRC allows some minor late filings and payments, but repeated or more serious lateness can lead to the withdrawal of gross payment status. If you lose it, you’ll typically need 12 months of clean compliance before you can reapply.
You can apply through your HMRC online account or by using form CIS305 (for companies). Our team at Double Point can handle CIS registration and gross payment applications on your behalf if you’d prefer not to handle them yourself.
Monthly Returns: The Contractor’s Obligation
If you’re a contractor, you must submit a monthly CIS return to HMRC. This is due by the 19th of each month for the tax month just ended (which runs from the 6th of one month to the 5th of the next).
What Contractors Need to File Each Month
The return must include details of all payments made to subcontractors during that period – the gross amount, any deductions, and the cost of materials. You also need to confirm each subcontractor’s verification status.
Each monthly return should cover:
- The name and UTR of every subcontractor you’ve paid that month
- The gross amount paid, the deduction made, and the materials cost for each subcontractor
- Confirmation of each subcontractor’s verification status
- A declaration that employment status has been considered for each worker
If you haven’t made any payments to subcontractors in a given month, you currently don’t need to file a nil return (though you should notify HMRC of this). However, changes coming from April 2026 are expected to reintroduce mandatory nil returns. HMRC found that scrapping them in 2015 actually increased errors, so the requirement is being brought back.
Late CIS returns carry fixed penalties. The first late return in a tax year triggers a £100 penalty, and the fines escalate for subsequent late filings within the same year. If you’re consistently late, HMRC may also review your own gross payment status.
Deductions withheld from subcontractors need to be paid to HMRC by the 22nd of each month if paying electronically (or the 19th by post). These payments are made through your PAYE account, as CIS deductions are reported alongside your payroll liabilities.
Subcontractors: Reclaiming Your Deductions
If you’re a subcontractor who’s had CIS deductions made from your payments, that money isn’t lost – it’s been paid to HMRC on your behalf, and you reclaim it when you file your tax return.
How you reclaim depends on your business structure. Sole traders and partners report CIS deductions on the self-employment pages of their self-assessment return (forms SA103S or SA103F).
Limited companies reclaim through their monthly payroll via the Employer Payment Summary (EPS), offsetting CIS deductions against their PAYE, National Insurance, and CIS liabilities.
If the deductions exceed what’s owed, the company can claim a refund from HMRC. Importantly, limited companies should not try to reclaim CIS deductions through their Corporation Tax return – the payroll route is the correct one.
The key thing is record-keeping. You need to keep every payment and deduction statement your contractors give you. Without them, you won’t be able to prove what’s been deducted, and claiming those amounts back becomes much harder. If your contractor hasn’t given you a statement, ask for one – they’re legally required to provide it.
If your CIS deductions for the year exceed your actual tax liability, you’ll get the difference back as a refund. For many subcontractors, particularly in the early years of trading, this refund can be substantial. It’s one of the reasons getting your self-assessment filed on time matters – the sooner you file, the sooner you get your money back.
What’s Changing From April 2026
HMRC is updating CIS rules from 6 April 2026. Here’s what’s coming:
- If you make or receive a payment connected to tax fraud – and you knew or should have known – HMRC can remove your gross payment status immediately and stop you reapplying for 5 years.
- HMRC can also assess the related tax loss and charge a 30 percent penalty (which may apply to the business or, in some cases, its officers).
- Contractors are expected to have to file a nil return for months with no subcontractor payments unless they have already told HMRC in advance that no payments will be made that month.
- Payments to local authorities and certain public bodies are expected to be taken out of CIS.
If your records are not in order, now is the time to sort them.
Common Mistakes to Avoid
Having walked through how CIS works, it’s worth flagging the errors we see most often at Double Point when new clients come to us with CIS problems:
- Not verifying subcontractors before paying them. Contractors should verify each subcontractor with HMRC before the first payment, and whenever verification is required, to ensure the correct deduction rate is applied. If you skip this and apply the wrong rate, you’re liable for the shortfall.
- Deducting from the full invoice instead of just the labour element. Materials and VAT should always be excluded from the deduction calculation.
- Subcontractors not keeping payment and deduction statements. Without these, reclaiming deductions through your tax return becomes a fight with HMRC.
- Missing the monthly return deadline. The penalties start at £100 and escalate quickly, and late returns can also put your gross payment status at risk.
Your CIS Checklist
Whether you’re just getting started or want to make sure nothing’s slipping through the cracks, here’s a step-by-step breakdown of what you actually need to do – split by whether you’re paying subcontractors, being paid as one, or both.
If you’re a contractor:
| Step | Task | When |
| 1 | Register for CIS with HMRC | Before hiring your first subcontractor |
| 2 | Verify each subcontractor with HMRC | Before their first payment |
| 3 | Deduct the correct rate from the labour portion of each payment | Every payment |
| 4 | Give the subcontractor a payment and deduction statement | Every payment |
| 5 | File your monthly CIS return | By the 19th of the following month |
| 6 | Pay deductions to HMRC | By the 22nd (electronic) or 19th (post) |
If you’re a subcontractor:
| Step | Task | When |
| 1 | Register for CIS with HMRC | Before starting work for a contractor |
| 2 | Check you’re being deducted at 20%, not 30% | First payment from each contractor |
| 3 | Collect and keep every payment and deduction statement | Every payment |
| 4 | Apply for gross payment status if eligible | Once you meet the turnover and compliance tests |
| 5 | Report CIS income and deductions on your tax return (self-assessment or EPS for companies) | Annually (31 January for sole traders) |
| 6 | Claim back any overpaid tax | When you file your return |
How Double Point Can Help
CIS touches tax planning, self-assessment, bookkeeping, and payroll – it’s rarely just one thing.
At Double Point, our CIS services cover the full picture. We handle registration and verification, prepare and file your monthly returns, manage deduction calculations, and make sure subcontractors reclaim every penny they’re owed when filing their tax returns.
Whether you’re a contractor trying to stay on top of monthly obligations or a subcontractor who wants to apply for gross payment status and stop losing 20% of every payment, we can help.
Book a free consultation with Double Point and let’s get your CIS obligations sorted properly from the start.