CIS GUIDE

How CIS tax works for contractors and subcontractors.

The Construction Industry Scheme, or CIS, changes how money moves between building businesses. Contractors take tax off what they pay subcontractors and send it to HMRC. This guide explains who is involved, how the deduction is worked out and how the tax is settled at the end.

Figures for the 2026/27 tax year · Last reviewed 21/10/2026

The basic idea behind CIS

CIS is a way of collecting tax early. When a contractor pays a subcontractor for construction work, the contractor usually keeps back part of the payment. That part goes to HMRC instead of the subcontractor.

The money held back is not an extra tax. HMRC treats it as an advance payment towards the subcontractor's own tax and National Insurance bill. When the subcontractor's tax for the year is worked out, those deductions are set against it.

Contractor or subcontractor: which are you?

A business can be one, the other, or both at once. A builder who hires a roofer is a contractor for that job. The same builder working for a larger firm is a subcontractor on that job.

Contractors

You must register as a contractor if you pay subcontractors for construction work. You must do this before you take on your first subcontractor.

Some businesses outside construction also have to register. This applies if the business has spent more than £3 million on construction in the 12 months since its first payment for construction work.

Subcontractors

Subcontractors do not have to register for CIS. But if they do not, contractors must deduct at a higher rate. Sole traders, partners and limited company owners who work for contractors can all register. Employees do not register for CIS, because they pay tax through PAYE instead.

What work CIS covers

CIS covers most construction work on buildings and structures, whether permanent or temporary. It includes:

Site preparation, demolition, building work, alterations, repairs and decorating
Civil engineering, such as roads and bridges
Installing heating, lighting, power, water and ventilation systems
Cleaning the inside of buildings after construction work

Some jobs are outside the scheme. These include architecture and surveying, scaffolding hire with no labour, carpet fitting, making construction materials, delivering materials, and non-construction work on site such as running a canteen.

The three deduction rates

The rate a contractor uses depends on the subcontractor's status. HMRC tells the contractor which rate to use when the subcontractor is verified.

20%: the standard rate, for a subcontractor who is registered for CIS
30%: the higher rate, for a subcontractor who is not registered
0%: for a subcontractor with gross payment status, who is paid in full with no deduction

How the deduction is worked out

The rate is not applied to the whole invoice. The contractor starts with the gross invoice total, then takes off the amounts the subcontractor paid for themselves. These are:

VAT
Materials the subcontractor bought directly, including the cost of manufacturing or prefabricating them
Consumable stores, meaning items used up on the job
Fuel used for the work, other than for travel
Plant hired for the job

The rate is then applied to what is left, which in practice is mostly the labour. If the subcontractor has no receipts for materials, the contractor may estimate the materials cost. Keeping receipts avoids that guesswork.

A worked example

This example is made up to show the maths. Imagine a self-employed plasterer who is not VAT registered. They invoice a contractor £3,000 for a job: £2,400 for labour and £600 for materials they bought themselves.

The contractor takes off the £600 of materials, leaving £2,400. At the 20% rate the deduction is £480, so the plasterer receives £2,520 and £480 goes to HMRC.

If the plasterer had not registered, the 30% rate would apply. The deduction would be £720 and the payment £2,280. With gross payment status, the full £3,000 would be paid.

What contractors have to do

Being a contractor brings a regular monthly routine. The main steps are:

Check employment status. First decide whether the person should be an employee rather than a subcontractor.
Verify new subcontractors. Before paying a new subcontractor, check them with HMRC. You also need to verify anyone you have not included on a CIS return in the current or last 2 tax years.
Deduct at the right rate. Use the rate HMRC gives you, applied to the amount left after allowable costs.
Give statements. Send each subcontractor a payment and deduction statement within 14 days of the end of each tax month.
File the monthly return. Send it to HMRC by the 19th of the month after the tax month ends.
Pay HMRC. Pay deductions by the 22nd of the month, or the 19th if paying by post.

Our guide explains how to pay CIS deductions online.

Tax months run from the 6th of one month to the 5th of the next. So for the tax month of 6 May to 5 June, the return and the statements are both due by 19 June.

If you already run payroll, HMRC combines your PAYE and CIS into one scheme. You then pay PAYE tax, National Insurance and CIS deductions together.

If you paid no subcontractors in a month, you still need to act. You can file a nil return, or tell HMRC you have temporarily stopped using subcontractors.

Late return penalties

HMRC charges penalties for late monthly returns:

1 day late: £100
2 months late: £200
6 months late: £300 or 5% of the CIS deductions on the return, whichever is higher
12 months late: £300 or 5% of the CIS deductions on the return, whichever is higher

After 12 months there may be a further penalty of up to £3,000 or 100% of the deductions, whichever is higher.

Records to keep

Contractors must keep CIS records for at least 3 years after the end of the tax year they relate to. That means the gross amount of each subcontractor invoice excluding VAT, the deductions made, and the materials costs invoiced where deductions were made. HMRC can fine you up to £3,000 if you cannot show these records when asked.

How subcontractors get their deductions back

For a subcontractor, the deductions are a credit against the tax they would owe anyway. How they use that credit depends on how the business is set up.

Sole traders and partners

You claim through your Self Assessment tax return after the end of the tax year. You enter your full pay before deductions as income, and the total deductions as CIS deductions. If the deductions are more than your tax and National Insurance bill, HMRC pays back the difference. If you still owe tax, it is due by 31 January after the tax year ends.

This is why a subcontractor's own bookkeeping matters. Expenses lower the profit, and the lower the profit, the more of the deductions may come back.

Limited companies

A limited company does not use its Corporation Tax return for this. Instead it sets the deductions against what it owes through its payroll scheme. It sends its usual Full Payment Submission and an Employer Payment Summary showing the year-to-date CIS deductions. HMRC takes these off the amount due, and the company pays the balance.

Unused deductions can be carried forward within the same tax year. Anything left after the year ends can be claimed as a refund.

Every subcontractor should keep their monthly statements. HMRC may ask for evidence of the deductions, and the statements are that evidence. If one is missing or wrong, ask the contractor for it.

Gross payment status

Subcontractors who would rather not have tax taken in advance can apply for gross payment status. To qualify, HMRC looks at three things:

Business test: the business does construction work, or provides labour for it, in the UK, and is run through a bank account
Turnover test: turnover in the last 12 months, excluding VAT and materials, of at least £30,000 for a sole trader; for a partnership or company, £30,000 per partner or director, or at least £100,000 in total
Compliance test: a history of paying tax and National Insurance on time

If a company is controlled by 5 people or fewer, it needs turnover of £30,000 for each of them. HMRC reviews gross payment status every year. Late returns or payments can lead to it being withdrawn, and after that you must wait a year before you can apply again.

VAT-registered? The VAT domestic reverse charge can apply to standard and reduced rate construction services that are reported within CIS, between UK VAT-registered businesses. It is a separate set of rules from the CIS deduction and is worth checking before you invoice.

Common CIS mistakes

Applying the rate to the whole invoice, including VAT and materials
Paying a new subcontractor before verifying them
Missing the 19th for a monthly return, including months with no payments
Subcontractors losing monthly statements, then struggling to prove deductions
Entering net pay instead of gross pay on a Self Assessment return
Limited companies trying to claim deductions through Corporation Tax

Why tidy books make CIS easier

CIS runs on a monthly cycle with fixed dates. When each payment is recorded with its labour, materials and deduction split out, the monthly return is quick to prepare and the subcontractor statements match the bank.

Daily bookkeeping keeps that cycle under control. Bank lines are matched to invoices and statements as they arrive, missing paperwork is followed up while it is easy to find, and the deductions are ready to use when the tax return is due.