You’ve just hired a subcontractor to help install steelwork on-site. The quote’s agreed, the schedule’s locked in, and then the tax question creeps in. Are they CIS registered? Do you need to deduct 20% or 30%? That’s where the Construction Industry Scheme comes in, and if you’re working in the building trade, you need to get it right.
The Construction Industry Scheme (CIS) affects nearly every contractor and subcontractor in the UK construction industry. It's HMRC's way of making sure construction businesses handle tax correctly, and the rules aren't always easy to follow.
In this guide, you'll get a plain-English breakdown of how the CIS scheme works, who it applies to, how deductions are calculated, and what steps you need to take to stay compliant. We'll also show you how construction software can take care of the admin so you can get back to the jobsite without worrying about compliance.
What Is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme is HMRC's system for managing tax collection across the construction sector, designed to reduce tax evasion and improve compliance across construction operations.
CIS in Plain Terms
The CIS scheme is a UK government scheme for taxing subcontractors in the construction industry. It was introduced to prevent tax evasion and make sure contractors deduct money from subcontractor payments and report them properly to HMRC.
Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor's pay and send it to HMRC on their behalf. This advance payment system helps collect tax and national insurance contributions before final tax returns are filed.
The scheme applies to most construction work and affects both mainstream contractors and deemed contractors who spend large amounts on construction operations annually.
For more details, check out the official Construction Industry Scheme guide from HMRC.
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Book a demoWho It Applies To
The Construction Industry Scheme applies to anyone paying or receiving payments for construction operations. That includes contractors, subcontractors, and deemed contractors, like property developers or other businesses spending over £3 million on construction work within 12 months.
Mainstream Contractors
Mainstream contractors include construction businesses, property developers, and local authorities who regularly work with subcontractors for construction work. They must register with HMRC and follow CIS procedures for all subcontractor payments.
Subcontractors
Subcontractors working in the construction industry need to register under the CIS scheme to get the lower pay deduction rate. Self-employed subcontractors and limited company subcontractors both fall under these rules when performing construction operations.
Deemed Contractors
Deemed contractors are businesses that spend over £3 million on construction work in any 12-month period, even if construction isn't their main business. This includes:
- Property investors
- Local education authorities
- Large corporations with big construction projects
What Counts as Construction Work Under CIS?
The Construction Industry Scheme covers specific types of construction operations. Some activities don't qualify as construction work under the regulations, so it's critical to know if it impacts you.
Covered Under CIS
Construction operations impacted by the CIS include site preparation work such as groundworks, demolition, and site clearing. Building work covers commercial and residential construction, extensions, repairs, and refurbishment projects across all construction sites.
Specialist trades covered include:
Cleaning work inside buildings after construction work is completed also counts as construction operations under the CIS scheme. You can count landscaping and external work that's part of construction projects in this list, too.
The scheme covers both labour-only subcontractors and those supplying materials as part of their construction work. Keep in mind that different deduction rules apply to materials and labour costs.
Exempt from CIS
Non-construction operations include architecture, surveying, and design work that doesn't involve physical construction activities.
Other trades that don't fall under the Construction Industry Scheme are: scaffolding hire without labour, carpet fitting, and delivery of materials only.
Making materials or components off-site for later installation doesn't qualify as construction operations under the CIS Tax. Other jobs you can cross off the list are:
- Pure consultancy work
- Planning applications
- Project management without actual construction work
- Maintenance of office equipment
- IT systems
Other non-construction tasks that don't fall under construction operations, even when performed on construction sites, are also excluded.
For complete details on what qualifies, check the official CIS guidance.
How to Sign Up for CIS as a Contractor or Subcontractor
Registration requirements differ depending on whether you're acting as a contractor paying others or a subcontractor receiving payments for construction work.
As a Contractor
Contractors must register via Government Gateway using their unique taxpayer reference number. Once registered, contractors have to verify subcontractors before making the first payment. You'll check their CIS registration status and use that to determine their pay deduction.
Contractors are legally required to deduct tax from subcontractor payments unless the subcontractor has gross payment status. This applies to all contractors, whether sole trader, limited company, or deemed contractor status.
The registration process requires providing business details, contact information, and confirming your status as someone who will pay subcontractors for construction operations within the construction sector.
Keep in mind you'll need a government gateway user ID.
As a Subcontractor
Subcontractors that sign up get the lower deduction rate of 20% instead of the higher 30% rate applied to unregistered subcontractors. Registration requires having a unique taxpayer reference (UTR) from HMRC, which is the governing body.
Self-employed individuals and limited companies doing construction work can also register as subcontractors under the Construction Industry Scheme. The registration covers your CIS tax and national insurance obligations under the scheme.
Registration helps establish your subcontractor's status and enables you to receive payments with the correct deductions. Without registration, contractors must deduct tax at the higher 30% rate from all payments.
For step-by-step registration guidance, see HMRC's contractor obligations.
How Do CIS Deductions Work?
If you don't want to end up in hot water, you need to understand CIS deduction rates and what they apply to. Contractors making payments and subcontractors receiving them should get familiar with this list.
CIS Deduction Rates & What's Included
Tax deductions apply to labour costs, administrative charges, and markup, but not to the direct cost of materials when properly documented. VAT and separate travel expenses are also excluded from CIS deductions when clearly itemised.
Contractors must issue a payment and deduction statement to each subcontractor monthly, showing gross payment, deductions made, and net amount paid. These deduction statements help subcontractors with their self-assessment or corporation tax returns.
The deduction rates are set by HMRC and apply across all construction operations. Deductions count as advance payments towards the subcontractor's final tax and national insurance bill for the tax year.
For detailed payment procedures, refer to HMRC's payment guidance.
What is Gross Payment Status Under CIS?
Gross payment status lets established subcontractors receive payments without tax deductions. This way, they can handle their tax obligations through a normal self-assessment or corporation tax processes.
What is a Gross Payment Status?
Subcontractors with gross payment status get the full payment amount without any taxes being taken out at the payment stage. They handle their tax and national insurance contributions through a self-assessment return or corporation tax if they're a limited company.
Usually, this is applied to established construction businesses with good tax compliance records. The HMRC trusts that they handle their taxes without advance deductions from contractors.
How to Qualify
To qualify for gross payment, subcontractors need:
- A business bank account
- A history of timely tax filing
- Sufficient turnover
Sole Traders vs Limited Companies
Both business structures must show financial stability and a reliable tax payment history to maintain gross payment status. However, there are some important differences:
- Sole traders must show at least £30,000 annual turnover excluding VAT and materials costs.
- Limited companies have different turnover requirements and must prove consistent tax compliance.
Gross payment status can be reviewed and removed if compliance standards slip.
For application details, see HMRC's gross payment guidance.
What to Submit for Monthly CIS Returns and Record-Keeping
Monthly CIS returns are mandatory for all contractors. They require detailed reporting of subcontractor payments and deductions made during each month. Here's what you need to know:
What You Must Do Each Month
Contractors must submit monthly CIS returns by the 19th of each month covering all payments made to subcontractors during the previous month. This includes zero returns when no payments were made to subcontractors.
The monthly returns must include:
- Details of all subcontractor payments
- CIS deductions made
- Verification subcontractors were properly checked before the first payment
Late submission incurs automatic penalties from HMRC.
Returns are submitted online through the Government Gateway user portal using the contractor's CIS registration details. Be sure all your records are accurate for your construction operations and subcontractors.
Payment and Deduction Statements
Contractors must issue payment and deduction statements to subcontractors monthly. These statements need to show:
- Gross amount due
- CIS deductions made
- Net pay received
- Contractor's details
- Subcontractor's status
- Period covered
- Breakdown of payments and deductions
Your subcontractors' tax records rely on you submitting this information. Subcontractors need these for their self-assessment or corporation tax returns. Messy or inaccurate deduction statements can ruin a relationship with a great contractor.
You can submit either digital or paper statements, but they must be issued within 14 days of the end of each month when payments were made.
For complete submission requirements, check HMRC's return guidance.
Other CIS Considerations for Tradies
Beyond basic deduction rates, the CIS scheme changes slightly depending on how you run your business.
Employment Status
The CIS scheme only applies to genuinely self-employed subcontractor construction workers. Employees fall under PAYE rules. These have their own tax and national insurance setups.
Misclassifying employment status risks major penalties from HM Revenue and Customs, including backdated tax, national insurance contributions, and interest charges. Keeping the line clear between employed and self-employed is crucial for CIS compliance.
IR35 rules can also affect limited company subcontractors. It can potentially change your tax treatment even when working through your own companies. It's also best to get professional advice if your employment status is tricky.
VAT Reverse Charge
The VAT reverse charge kicks in when both the contractor and subcontractor are VAT registered. Instead of the subcontractor adding VAT to the invoice and collecting it, the contractor handles the VAT on their end through their own VAT return.
This rule was brought in to stop VAT fraud in construction, and it runs alongside CIS—it just deals with VAT, not income tax.
If you’re a subcontractor, this means you won’t be getting VAT payments from your clients. You’ll still need to account for it in your returns, which can affect your cash flow if you’re used to collecting that money upfront.
For VAT reverse charge details, see HMRC's VAT guidance.
CIS Rules Depending on Your Business Setup
How the Construction Industry Scheme applies depends on how your construction business is set up—whether you're a sole trader or running a limited company.
Sole Trader Requirements
If you're a sole trader and you both take on jobs and hire others to help, you’ll need to register as both a contractor and a subcontractor. You’ll use the same UTR (Unique Taxpayer Reference) for both.
When you file your Self Assessment tax return, you'll report any CIS income and deductions. Those deductions are basically advance payments toward your overall tax and national insurance bill.
You’ll also need to keep solid records—every payment you make or receive, deductions taken or applied, and the details of each job throughout the tax year.
Limited Company Obligations
If you operate as a limited company, the business itself has to be registered under CIS. You’ll also need to nominate someone responsible for making sure everything’s done right, like submitting monthly returns or verifying subcontractors.
If the company’s directors or shareholders are doing hands-on construction work, they may need to register personally under CIS, too.
Any deductions made to your company as a subcontractor will go toward your Corporation Tax bill. If you’re the one paying subcontractors, those deductions help reduce the company’s tax in advance.
CIS for Developers, Local Authorities & Property Investors
CIS doesn’t just apply to traditional construction companies. If you're paying for building work—even if construction work isn't your main business—you could still be on the hook.
Property Developers and Deemed Contractors
If you're a property developer or a speculative builder, you're already in CIS territory. And if your business spends £3 million or more on construction in any 12-month window, HMRC considers you a deemed contractor, even if building isn’t what you normally do.
That means CIS applies to property investors, developers, and even large businesses doing things like fitting out shops or building new offices. It's all based on how much you spend on construction, not what your company does day to day.
Local Authorities and Housing Associations
Local authorities that fund or commission construction work directly must register as contractors under the Construction Industry Scheme (CIS). This includes any local education authority, maintained school with delegated budgets, and housing association acting as a contractor.
When the Construction Industry Scheme applies, these public sector bodies must verify subcontractors, deduct tax correctly, issue monthly CIS returns, and send payment and deduction statements—just like private construction businesses.
Charitable organisations involved in construction operations for charitable purposes may also fall under CIS rules, depending on how much construction work they commission. If spending crosses the threshold, they may be treated as deemed contractors, meaning they must handle CIS deductions, verify subcontractor’s status, and submit monthly returns to HM Revenue.
For public sector guidance, see the official CIS guide.
Common CIS Mistakes
Even experienced contractors and subcontractors slip up on CIS rules. Here’s where things usually go wrong, and how to avoid penalties from HM Revenue.
- Not verifying subcontractors before first payment – Contractors must verify subcontractors’ CIS registration before making payments. Skipping this leads to wrong deduction rates and penalties.
- Using the wrong deduction rate – Applying 20% to unregistered subcontractors or 30% to registered ones results in incorrect CIS deductions and issues with subcontractor’s status.
- Deducting tax from materials or VAT – Contractors deduct money only from labour and markup, not materials or VAT. Mistakes here affect the subcontractor’s tax and national insurance contributions.
- Missing monthly returns – Failing to submit monthly CIS returns leads to penalties, even if no subcontractor’s payments were made.
- Not issuing deduction statements – Contractors must issue a payment and deduction statement monthly. Subcontractors need them for self-assessment and to track advance payments.
- Misclassifying employment status – CIS only applies to self-employed subcontractors. Treating employees as subcontractors causes issues with tax and national insurance.
How Construction Software Can Help You Stay CIS-Compliant
Managing CIS manually opens the door to errors and eats up valuable time that could be spent on construction operations. Using modern accounting software helps contractors stay compliant with the Construction Industry Scheme (CIS) by automating core tasks and reducing the risk of mistakes with CIS deductions and monthly CIS returns.
Digital systems make it easier to verify subcontractors, log their subcontractor’s status, and check gross payment status using their unique taxpayer reference. This ensures contractors deduct money correctly, apply the right deduction rates, and meet their CIS registration obligations without delays.
With automated CIS deduction calculations, you avoid missteps when calculating tax deductions and can generate a compliant payment and deduction statement for each subcontractor. These advance payments count toward the subcontractor’s tax and national insurance bill for the tax year, and need to be accurate.
Submitting monthly returns electronically through software ensures you meet HM Revenue deadlines while keeping audit trails and deduction statements organised. Cloud-based construction software allows contractors and subcontractors to manage CIS from the office or construction sites.
This makes sure everything is compliant and makes it much easier to handle subcontractors’ payments across all construction operations.
Compliance Doesn't Have to Be a Full-Time Job
The CIS scheme represents one of the more complex aspects of running construction businesses, but proper systems and procedures make compliance manageable alongside day-to-day construction operations.
Understanding verification requirements, deduction rates, and monthly reporting obligations helps avoid penalties while maintaining positive relationships with subcontractors and HMRC.
With robust systems in place, contractors can track gross payment status, issue monthly statements, and avoid penalties without spending excessive time on administrative tasks, instead of productive construction work.
If you're ready to streamline your CIS compliance and reduce administrative overhead, book a demo and see how our platform can support your construction business's growth and compliance needs.
