The Construction Industry Scheme (CIS) is the set of HMRC rules that decides how contractors in UK construction pay their subcontractors — and how much tax comes off each payment. Getting it wrong can mean a 30% deduction, late-filing penalties, or tax you thought was paid. This guide covers who the Construction Industry Scheme applies to, the 20% and 30% rates, monthly returns, and gross payment status. Figures are current for 2026/27.
What Is the Construction Industry Scheme?
The Construction Industry Scheme is HMRC’s system for collecting tax from subcontractors working in UK construction. Under it, a contractor deducts a percentage of each payment to a subcontractor and pays it directly to HMRC. The deduction is an advance payment towards the subcontractor’s Income Tax and National Insurance, not an extra charge, and any excess can be claimed back.
It covers most UK construction work — building, alterations, repairs and demolition — but not professional work such as architecture or surveying, carpet fitting, or delivery of materials.
Who Counts as a Contractor or Subcontractor?
A contractor is a business that pays subcontractors for construction work. That includes building firms, but also any business spending more than £3 million on construction work in a rolling 12-month period — “deemed contractors”, including housing associations and retailers that would not see themselves as construction companies. Contractors must register for CIS with HMRC before paying a subcontractor.
A subcontractor is a business or self-employed worker carrying out construction work for a contractor. Registration is not compulsory for subcontractors, but an unregistered one has 30% deducted instead of 20%, so registering is almost always worth it. Many businesses are both — subcontractors to a main contractor while hiring their own subcontractors elsewhere.
The Construction Industry Scheme Deduction Rates: 20%, 30% and 0%
- 20% — the standard rate. For subcontractors registered with HMRC. The deduction comes from the labour element only — not materials, plant hire or VAT.
- 30% — the higher rate. For subcontractors not registered for CIS, or whose details cannot be verified. On £5,000 of labour, that is £1,500 deducted instead of £1,000.
- 0% — gross payment status. Subcontractors with gross payment status are paid in full. HMRC grants it to established businesses that meet its tests — see below.
Worked Example: A £6,000 Invoice Under CIS
Example: a subcontractor invoices £6,000 plus VAT for a job: £5,000 for labour and £1,000 for materials. The Construction Industry Scheme deduction applies only to the labour element. If registered, the contractor deducts 20% of £5,000 — £1,000 — and pays £5,000, before VAT is handled separately. If unregistered, the deduction is 30% — £1,500 — and they receive £4,500. That £500 gap on a single invoice is why registering matters.
How Contractors Verify Subcontractors
Before paying a subcontractor for the first time, the contractor must verify them with HMRC using the CIS online service. It needs the subcontractor’s Unique Taxpayer Reference (UTR), their National Insurance number if an individual, and their company registration number if a limited company. HMRC then confirms whether the subcontractor is registered and which deduction rate applies — 20%, 30% or 0%. Verification is done once per subcontractor, not before every payment. A practical walkthrough is set out in this guide to how to check your CIS status. Keep a record of every verification — HMRC can ask for evidence that the correct rate was applied.
Monthly Returns Under the Construction Industry Scheme
Every contractor must send HMRC a monthly return under the Construction Industry Scheme, listing every subcontractor paid in the tax month, amounts paid and deductions made. The tax month runs from the 6th to the 5th, and the return is due by the 19th of the following month. The deductions must also be paid to HMRC by the 19th — or by the 22nd if paying electronically.
A return is needed even in a month with no subcontractor payments — a nil return. Late returns attract fixed penalties starting at £100 per month, with further penalties the longer a return is overdue. Contractors also give each subcontractor a monthly payment and deduction statement, needed to claim the deductions back. Many contractors run CIS through their payroll system — a comparison of payroll software for small businesses can help when choosing one that handles CIS deductions.
Gross Payment Status: How to Qualify
Gross payment status means a subcontractor is paid in full, with no deduction under the Construction Industry Scheme. HMRC grants gross payment status under the Construction Industry Scheme when three tests are met: a business test, a turnover test and a compliance test.
The turnover test requires at least £30,000 turnover in the 12 months before applying, for sole traders; partnerships and companies have their own thresholds. The compliance test requires tax and National Insurance to have been paid on time. HMRC can withdraw gross payment status if the business later fails these conditions.
How Subcontractors Get Their Construction Industry Scheme Deductions Back
CIS deductions are not lost money — they count as advance payments of tax. A sole trader claims them back through Self Assessment: deductions are entered on the tax return and offset against Income Tax and Class 4 National Insurance due, with any excess refunded by HMRC.
A limited company offsets them against its PAYE, National Insurance and Corporation Tax liabilities instead. Keep the monthly payment and deduction statements — they are the evidence HMRC expects. Our guide to Self Assessment deadlines and penalties sets out the dates for claiming deductions back.
CIS and Employment Status: Not the Same Thing
One of the most expensive mistakes in construction is assuming that paying someone under CIS makes them self-employed. It does not. The Construction Industry Scheme is only a method of collecting tax — employment status is separate, decided by the working arrangements: who controls the work, whether the worker can send a substitute, and who bears the financial risk.
An employee must still be paid through PAYE with employer National Insurance, even if CIS deductions were applied. Our guides to PAYE and payroll basics and to IR35 and off-payroll working explain how that status question is decided.
Common CIS Mistakes to Avoid
- Paying before verifying. Verify a new subcontractor with HMRC before the first payment — the wrong rate from the start is hard to unwind.
- Deducting from materials. The deduction applies to labour only. Deducting from the full invoice, including materials and VAT, over-deducts and creates disputes.
- Missing nil returns. A month with no subcontractor payments still needs a return — skipping it collects penalties for nothing.
- Losing deduction statements. Without them, a subcontractor cannot prove what was deducted when claiming it back.
Frequently Asked Questions
Do I have to register as a subcontractor under the Construction Industry Scheme?
No, but an unregistered subcontractor has 30% deducted instead of 20%. Registering with HMRC is free and usually worth doing before taking on construction work.
Does CIS apply to materials and VAT?
No. Deductions come from the labour element of a payment only — materials, plant hire and VAT are excluded.
What happens if a contractor files a CIS return late?
Late returns attract fixed penalties starting at £100 per month, with more if the return stays outstanding. Deductions are due by the 19th (22nd electronically), and interest can apply to late payment.
Can a contractor be fined for not registering for CIS?
Yes. A business that should be registered — including a “deemed contractor” spending over £3 million on construction in 12 months — can face penalties, interest and backdated deductions.
If you are a contractor setting up the Construction Industry Scheme, or a subcontractor wondering why 30% is coming off your invoices, we can help you register, verify your status and get the deductions right. See our services or contact us — email info@financialaccountingfirm.co.uk.
This article is general information, not personal tax or financial advice.
