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

What CIS is and who it applies to

The Construction Industry Scheme (CIS) is an HMRC tax collection mechanism for the construction industry. It requires contractors to deduct 20% (or 30% for unregistered subcontractors) from payments to subcontractors for construction work, paying those deductions to HMRC on the subcontractor's behalf.

You are a contractor under CIS if you:

• Pay subcontractors for construction work
• Spend more than £1 million per year on construction in any rolling 3-year period (even if construction is not your primary business)

You are a subcontractor under CIS if you:

• Carry out construction work for contractors
• Receive payments that are subject to CIS deductions

Many people are both — a main contractor who subcontracts specialist work.

How CIS deductions work

When a contractor pays a CIS subcontractor:

• Registered subcontractor (20% rate): Contractor deducts 20% from the labour element of the invoice and pays the net to the subcontractor. The 20% is paid to HMRC on the subcontractor's behalf.

• Unregistered subcontractor (30% rate): If the subcontractor is not registered with CIS, the deduction rate is 30% — a strong incentive to register.

• Gross payment status: Subcontractors who meet HMRC's criteria (turnover and compliance history) can apply for gross payment status — no deductions are made. They pay their own tax directly.

Note: CIS deductions apply to the labour element only. Materials supplied by the subcontractor are excluded from the deduction calculation.

Contractor obligations

Monthly returns: Contractors must submit a CIS monthly return to HMRC by the 19th of the month following payment. This declares all payments made to subcontractors and the deductions made.

Verification: Before paying a subcontractor for the first time, contractors must verify the subcontractor's status with HMRC using their UTR and name. HMRC confirms the correct deduction rate. This is done through the Government Gateway or software.

Statements to subcontractors: Each time a deduction is made, the contractor must provide the subcontractor with a written statement showing the gross payment, the deductions, and the net payment.

Subcontractor bookkeeping

As a subcontractor, CIS deductions are money you have effectively paid on account toward your tax bill. When you complete your Self Assessment:

• Your gross CIS income goes on the self-employment pages
• Your CIS deductions suffered go on a separate box (Box 38 on the SA103 Short form)
• The deductions reduce your tax liability — effectively you get credit for tax already collected

This means many subcontractors actually receive a tax refund at year-end because their CIS deductions exceed their actual income tax and NIC liability.

Your bookkeeping should record:

• The gross invoice you raised
• The CIS deduction suffered (money you did not receive)
• The net amount received

Most cloud accounting platforms (Xero, QuickBooks) have built-in CIS features that handle this automatically.

Common CIS mistakes

Not verifying subcontractors: Paying a subcontractor without HMRC verification and applying the wrong deduction rate creates a liability for the contractor.

CIS on materials: Deducting CIS from the full invoice (including materials) rather than the labour element only results in over-deduction. Materials used are excluded from the CIS calculation, though materials that are part of a labour charge are included.

Missing the 19th deadline: Late monthly returns trigger automatic £100 penalties. Persistent late filing attracts significantly higher penalties.

Not recording CIS deductions: Subcontractors who do not record CIS deductions in their bookkeeping miss them on their Self Assessment and overpay tax.

CIS is one of the more complex compliance areas for the construction industry. A bookkeeper with CIS experience will ensure contractor returns are correct and subcontractor credits are accurately claimed.