If you run a building or construction business, you may already know that the Construction Industry Scheme (CIS) is something you need to deal with when you work with subcontractors.
But CIS can be confusing, particularly for small building firms that find themselves working on both sides of the scheme.
You might be a subcontractor when a larger construction company engages your business, but a contractor when you bring in an electrician, plumber, plasterer or another specialist to work on one of your own projects.
This guide explains how CIS works, what your responsibilities are as a contractor and subcontractor, how CIS deductions are calculated, and some of the common mistakes to avoid.
Please note: CIS rules can be detailed, and whether a particular service or payment falls within the scheme depends on the circumstances. This guide is intended as a general overview rather than specific tax advice.
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a tax scheme operated by HM Revenue & Customs (HMRC) for businesses and individuals working in the construction industry.
Under CIS, contractors deduct tax from certain payments made to subcontractors and pay those deductions to HMRC. The deductions are treated as advance payments towards the subcontractor’s tax and National Insurance.
The standard deduction rate is 20% for registered subcontractors.
If a subcontractor is not registered for CIS, or cannot be verified by HMRC, the contractor will normally have to deduct 30%.
Some subcontractors can apply for Gross Payment Status, which means contractors can pay them without making CIS deductions.
Does CIS apply to the work you’re paying for?
One of the first things a contractor needs to establish is whether the work they’re paying for actually falls within CIS.
This isn’t always as straightforward as it sounds.
CIS covers a wide range of construction operations, including activities such as:
- Construction
- Alterations
- Repairs
- Extensions
- Demolition
- Dismantling
- Site preparation
- Painting and decorating
- Installation of certain systems
There are also services and circumstances that fall outside the scheme – see further information later in this article.
The contractor is responsible for deciding whether CIS applies
This is an important point that is sometimes misunderstood.
You should not simply rely on the subcontractor’s invoice, or whether they have included a CIS deduction on their invoice.
For example, a subcontractor might send you an invoice for:
“General building services – £3,000”
and make no reference to CIS.
That does not mean you can simply pay the £3,000 without considering CIS.
As the contractor, you need to establish:
- What work is being carried out?
- Does that work fall within CIS?
- Is the person or business genuinely a subcontractor rather than an employee?
- Has the subcontractor been correctly verified with HMRC?
- What CIS deduction rate applies?
- Which parts of the payment are subject to CIS?
The description on an invoice can be useful, but it does not determine the CIS treatment.
If you’re unsure whether a particular service or trade falls within CIS, contact us. We can help you establish whether CIS applies before you make the payment.
You can be both a contractor and a subcontractor
This is particularly important for small building firms.
Under CIS, the terms contractor and subcontractor describe the role your business is taking in a particular transaction. They don’t necessarily describe what your business is permanently.
For example, imagine you run a building company carrying out extensions and renovations.
A larger construction company might engage your business to carry out work on one of its projects. In that situation, you are their subcontractor.
You might then bring in a self-employed electrician to work on that project. In relation to the electrician, your business is the contractor.
So your business can be both a contractor and a subcontractor at the same time.
This means you may have CIS deducted from payments you receive, while also being responsible for deducting CIS from payments you make.
The responsibilities are different depending on which side of the transaction you are on.
CIS responsibilities for contractors
If your business pays subcontractors for construction work, you’ll generally need to register as a CIS contractor.
But being a CIS contractor involves more than simply registering with HMRC and deducting 20% from invoices.
You are responsible for making sure the CIS rules are applied correctly to the payments you make.
1. Determine whether CIS applies
Before making a payment, you need to establish whether the work you’re paying for falls within CIS.
This is the contractor’s responsibility.
Don’t assume that the subcontractor will tell you whether CIS applies. They may not mention CIS on their invoice, but that does not remove your responsibility to consider the rules.
HMRC’s guidance covers a wide range of construction operations, as well as specific examples of work that falls outside the scheme.
HMRC: Construction operations covered by CIS
CIS rules can be surprisingly detailed, particularly where a service sits close to the boundary between construction and non-construction work.
If you’re unsure whether a service you’re engaging falls within CIS, contact us and we can help you determine the correct treatment.
2. Check employment status
Once you’ve established that CIS potentially applies, you also need to consider whether the person you’re paying is genuinely self-employed.
CIS applies to subcontractors, not employees.
You cannot simply decide that someone is self-employed because they send you an invoice.
If the individual should actually be treated as an employee, they may need to be paid through PAYE instead.
This is particularly important because contractors have to make a declaration on their CIS return that they have considered the employment status of their subcontractors.
3. Verify the subcontractor
Before paying a new subcontractor, you will normally need to verify them with HMRC.
You’ll generally need information such as:
- Their Unique Taxpayer Reference (UTR)
- National Insurance number, for sole traders
- Their legal or trading name
- Company details, if they operate through a limited company
HMRC will tell you whether the subcontractor is registered for CIS and which deduction rate applies.
The subcontractor will generally fall into one of three categories:
Gross: No CIS deduction
20%: Standard CIS deduction
30%: Higher CIS deduction where the subcontractor is not registered or cannot be verified
4. Calculate the correct CIS deduction
CIS is not simply 20% of the subcontractor’s entire invoice.
Certain amounts can be excluded from the calculation, most notably materials paid for directly by the subcontractor.
For example:
| Amount | |
| Labour | £2,500 |
| Materials | £500 |
| Total invoice | £3,000 |
If the £500 materials qualify to be excluded from the CIS calculation:
£2,500 × 20% = £500 CIS deduction
The subcontractor would therefore receive:
£3,000 – £500 = £2,500
But don’t assume every expense is treated like materials
This is a common area of confusion.
Generally, qualifying materials can be excluded from the CIS calculation where the subcontractor has paid for them directly.
However, travel, accommodation and similar expenses are not automatically excluded simply because the subcontractor has listed them separately on their invoice.
For example, if a subcontractor invoices you for:
- Labour: £2,000
- Materials: £500
- Travel: £100
The qualifying £500 materials may be excluded, but the £100 travel charge will generally still form part of the amount subject to CIS.
So the CIS calculation would be based on:
£2,000 + £100 = £2,100
At 20%, the CIS deduction would be:
£2,100 × 20% = £420
This is an easy mistake to make when reviewing subcontractor invoices.
5. Give the subcontractor a deduction statement
Where CIS has been deducted, you need to provide the subcontractor with a payment and deduction statement.
The statement shows the payment made and the CIS deduction withheld.
The statement should normally be provided within 14 days of the end of the relevant CIS tax month.
These statements are important to the subcontractor because the CIS deductions need to be reflected in their own tax records. This is something that would be sent to your subcontractors by us if we are handling your CIS.
6. Submit your monthly CIS return
CIS returns are submitted to HMRC each month.
The CIS tax month runs from the 6th of one month to the 5th of the following month.
The return must normally reach HMRC by the 19th of the month following the end of the tax month.
For example:
6 May – 5 June → CIS return due by 19 June
You can submit your CIS return using HMRC’s online service or compatible commercial software.
If you haven’t made any payments to subcontractors during the month, you may still have an obligation to tell HMRC that you’ve made no payments, depending on the status of your CIS scheme.
Keeping your CIS records up to date throughout the month is much easier than trying to reconstruct everything at the deadline.
7. Pay the CIS deductions to HMRC
The CIS deductions you’ve made from subcontractors need to be paid to HMRC by the 22nd of the month.
For example:
6 May – 5 June → CIS return due by 22 June
The deduction is effectively tax collected from the subcontractor at source.
It’s therefore important that the amounts deducted from subcontractors, reported on your CIS return and paid to HMRC all reconcile.
CIS responsibilities for subcontractors
If your construction business works for other contractors, you may be treated as a CIS subcontractor.
Your responsibilities are different from those of a contractor.
1. Register for CIS
Subcontractors don’t have to register for CIS, but if you don’t register, contractors will normally have to deduct CIS at 30% rather than the standard 20%.
Registering for CIS can therefore make a significant difference to your cash flow throughout the year.
2. Give your contractor the correct information
When you start working for a new contractor, make sure you provide the correct:
- Business or trading name
- Unique Taxpayer Reference
- National Insurance number if you are a sole trader
- Company details, if applicable
The details need to match HMRC’s records so that the contractor can verify you successfully.
If the information doesn’t match, the contractor may be unable to verify you and could have to deduct CIS at 30%.
Lots of subcontractors opt to include the above information on their sales invoices to avoid queries and speed up the verification and payment process.
3. Check your CIS deduction statements
Your contractor should provide you with statements showing the payments made to you and the CIS deductions withheld.
Keep these statements and check them against your accounting records.
The treatment of CIS suffered will depend on your business structure.
For example, a sole trader will generally claim the CIS deductions against their own tax and National Insurance liabilities, whereas a limited company can generally use CIS suffered against certain PAYE and other liabilities, subject to HMRC’s rules.
This is one reason why it’s important to make sure all CIS deductions suffered are properly recorded.
Gross Payment Status: could you qualify?
Some subcontractors can apply for Gross Payment Status (GPS).
If you’re granted Gross Payment Status, contractors can pay you without deducting CIS.
This doesn’t mean you don’t have to pay tax.
Instead, you receive your income gross and remain responsible for accounting for your own tax and National Insurance.
Before applying, it’s worth checking whether you meet HMRC’s qualifying conditions.
There are three main tests.
1. Business test
Your business must:
- Carry out construction work, or provide labour for construction work in the UK; and
- Operate through a bank account.
2. Turnover test
You need to meet HMRC’s minimum turnover requirements.
The standard net construction turnover thresholds are:
| Business structure | Minimum net construction turnover |
| Sole trader | £30,000 |
| Partnership | £30,000 per partner, or £100,000 for the partnership |
| Limited company | £30,000 per director, or £100,000 for the company |
The turnover test is based on construction turnover excluding VAT and the cost of materials.
There are also alternative turnover tests in certain circumstances, so the figures above don’t cover every possible route to qualifying.
3. Compliance test
HMRC also needs to be satisfied that you’ve generally complied with your tax obligations.
This includes being up to date with relevant tax and National Insurance responsibilities and having submitted the required returns and payments.
All three tests need to be satisfied for Gross Payment Status to be granted.
If you’re considering applying for Gross Payment Status, we can help you review your position and check whether you appear to meet the relevant criteria before you apply.
CIS and VAT: don’t forget the domestic reverse charge
CIS and VAT are separate schemes, but they can both apply to the same subcontractor payment.
In certain circumstances, construction services between VAT-registered businesses are subject to the domestic reverse charge for construction services.
This means you may need to consider both:
- What CIS deduction should be made; and
- How VAT should be treated.
If this is something you would like us to assist you with please contact us.
CIS in practice: a worked example
Let’s put everything together.
Imagine your building company hires a self-employed plasterer.
Their invoice is:
| Amount | |
| Labour | £2,500 |
| Materials | £500 |
| Travel | £100 |
| Total invoice | £3,100 |
You’ve verified the subcontractor with HMRC and they’ve been confirmed as subject to the standard 20% CIS deduction.
Amount subject to CIS:
£2,500 labour + £100 travel = £2,600 (ignore materials)
CIS deduction:
£2,600 × 20% = £520
Amount paid to subcontractor:
£3,100 – £520 = £2,580
The £520 CIS deduction is then paid to HMRC and reported on your monthly CIS return.
The subcontractor’s gross income is still £3,100.
The £520 is a tax deduction at source, it isn’t a reduction in the value of the work they’ve invoiced you for.
Common CIS mistakes to avoid
Assuming the subcontractor will tell you whether CIS applies
It is the contractor’s responsibility to determine whether CIS applies. Don’t rely on the subcontractor mentioning CIS on their invoice.
Paying a subcontractor before verifying them
Make sure you’ve completed the necessary HMRC verification before making the payment.
Applying 20% to the entire invoice
Qualifying materials may be excluded from the calculation, so don’t automatically deduct CIS from the full invoice value.
Assuming every expense is excluded like materials
Travel, accommodation and similar expenses can still be subject to CIS.
Forgetting monthly CIS returns
CIS returns have strict monthly deadlines and penalties can apply if they’re late.
Assuming Gross Payment Status means no tax is payable
GPS simply means CIS isn’t deducted at source. The subcontractor is still responsible for paying their own tax.
Forgetting that your business can be both contractor and subcontractor
If you pay subcontractors but also carry out work for larger contractors, you may have responsibilities on both sides of CIS.
Forgetting about VAT
CIS deductions and the domestic reverse charge are separate rules. Both may need to be considered on the same transaction.
Frequently asked CIS questions
Do all construction businesses need to register for CIS?
Not necessarily.
If your business pays subcontractors for construction work, you’ll generally need to register as a contractor.
A business that only works as a subcontractor doesn’t have the same contractor registration obligation, although registering as a subcontractor is important if you want to avoid the higher 30% deduction rate.
Does CIS apply to limited companies?
Yes.
A subcontractor can be a limited company, as well as a sole trader or partnership.
The contractor will verify the company with HMRC and apply the appropriate CIS treatment.
Does CIS apply to every service provided by a construction business?
No.
CIS applies to particular types of construction operations, and there are circumstances where payments relating to construction businesses fall outside the scheme.
The contractor is responsible for determining whether CIS applies.
Do I deduct CIS from materials?
Generally, qualifying materials that the subcontractor has paid for directly can be excluded from the CIS calculation.
However, the rules are specific, and you shouldn’t automatically assume that every cost described as “materials” qualifies.
What about travel expenses?
Travel, accommodation and similar expenses can form part of the amount subject to CIS.
This is a common area of confusion because qualifying materials are treated differently from many other expenses.
If you’re unsure, check the treatment before making the payment.
What happens if I don’t register for CIS?
If you’re a subcontractor and don’t register, your contractor will generally have to deduct CIS at 30% rather than 20%.
Can I be both a contractor and a subcontractor?
Yes and this is very common for small building firms.
You might be a subcontractor when a larger construction company pays your business, but a contractor when your business pays an electrician, plumber, plasterer or another subcontractor.
How often do I submit a CIS return?
Contractors submit a CIS return every month.
The tax month runs from the 6th to the 5th of the following month, and the return must normally be submitted by the 19th.
Can my accountant deal with CIS for me?
Yes.
Depending on the services you agree with your accountant, they may be able to help with:
- Determining whether CIS applies
- Subcontractor verification
- CIS calculations
- Monthly CIS returns
- CIS deduction statements
- CIS suffered
- Gross Payment Status
- Related VAT issues
- General construction tax advice
For a small building firm, outsourcing CIS can take a significant amount of administration off your hands and reduce the risk of avoidable errors.
CIS support for construction businesses
Let’s be honest you didn’t get into construction because you love paperwork.
You’re busy managing jobs, dealing with customers, keeping projects moving and getting the work done. Keeping track of subcontractors, CIS deductions and monthly returns can feel like yet another job on the list.
That’s where we can help.
Whether you’re a small building firm, a specialist trade contractor, or a construction business that works both as a contractor and subcontractor, we can take the hassle out of your CIS responsibilities.
From checking whether CIS applies to a particular service, to verifying subcontractors, calculating deductions and submitting your monthly CIS returns, we’ll help make sure things are dealt with correctly and keep you on the right side of HMRC.
You focus on running your business. We’ll help with the paperwork.