Summary
The Construction Industry Scheme exists because HMRC long ago decided that construction was a sector where tax was easily lost — lots of self-employed subcontractors, lots of cash, lots of opportunity for income to go undeclared. CIS fixes that by moving the tax collection point upstream: instead of trusting the subcontractor to declare and pay later, the contractor deducts tax from the payment at source and sends it straight to HMRC. The subcontractor still does a tax return; the CIS deductions are simply credited against the bill, and any over-deduction is refunded.
The two roles are contractor and subcontractor, and a lot of tradespeople are both. You are a contractor for CIS purposes if you pay subcontractors for construction work — a builder who takes on a self-employed plasterer is a contractor. You are a subcontractor if you are paid by a contractor to do construction work. A jobbing builder who works for a main contractor on Mondays and hires in a labourer on Tuesdays is operating both sides of CIS in the same week.
The single most important number is the deduction rate, and it is the cheapest mistake to avoid: a registered subcontractor suffers 20% deduction; an unregistered one suffers 30%. Registering with HMRC is free and quick, and not doing it simply means handing HMRC an extra 10% of your labour money up front and waiting until your tax return to claw it back. The other key point — endlessly misunderstood on site — is that CIS comes off the labour only. Materials, VAT, plant hire and certain other costs are excluded from the deduction. Get the invoice split right and the deduction is correct.
Key Facts
- Who it covers — contractors and subcontractors carrying out "construction operations" in the UK; the definition is broad (building, alterations, repairs, demolition, installations, decorating, civils, site preparation).
- Deduction rates — 20% for a registered subcontractor; 30% for an unregistered subcontractor; 0% for a subcontractor with gross payment status.
- CIS applies to the labour element only — materials, VAT, plant hire (in defined circumstances), and certain other costs are excluded from the amount deducted.
- Contractors must verify subcontractors with HMRC before paying them — verification confirms the correct deduction rate.
- Monthly CIS returns — a contractor must file a monthly CIS return to HMRC (by the 19th of the month) and pay over the deductions made.
- Payment & deduction statements — a contractor must give each subcontractor a statement of payments made and tax deducted for each tax month.
- Gross payment status — a subcontractor who meets HMRC's turnover, compliance and business tests can be paid in full with no deduction, settling all tax via their own return.
- Subcontractor reclaim — CIS deductions are an advance payment; a subcontractor sets them against their Income Tax/NI (sole trader) or Corporation Tax/PAYE (company) and reclaims any excess.
- Not employment — CIS does not decide employment status; a worker treated as a CIS subcontractor who is really an employee is still an employment-status problem.
- VAT domestic reverse charge — for many CIS-covered B2B construction services, the VAT-registered customer accounts for the VAT, not the supplier — a separate but related rule.
- Penalties — late or missing monthly CIS returns attract escalating fixed penalties; getting deductions wrong creates liabilities for the contractor.
Quick Reference Table
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Try squote free →| Subcontractor status | Deduction from labour | How tax is settled |
|---|---|---|
| Registered for CIS | 20% | Deduction credited against tax return; excess refunded |
| Not registered for CIS | 30% | Deduction credited against tax return; excess refunded |
| Gross payment status | 0% | Subcontractor pays all tax via their own return |
| Element of invoice | Subject to CIS deduction? |
|---|---|
| Labour | Yes |
| Materials (genuinely supplied) | No |
| VAT | No |
| Plant hire (defined circumstances) | No |
| Plant/tool fuel and consumables | Treated with care — follow HMRC rules |
| CITB levy | No |
Detailed Guidance
Are you a contractor, a subcontractor, or both?
CIS has two roles and many tradespeople occupy both:
- You are a contractor if your business pays subcontractors for construction work. This includes the obvious main contractors and developers, but also a sole-trader builder who pays a self-employed chippy or labourer. There is also a "deemed contractor" category for businesses outside construction that spend heavily on construction over time — less relevant to most trades.
- You are a subcontractor if you are paid by a contractor to carry out construction work.
If you both work for contractors and pay subcontractors yourself, you must register and operate as both. The two sets of obligations run in parallel: you suffer deductions on the work you do for others, and you make deductions on the work others do for you.
Registering — and why 20% beats 30%
Registration is free and done with HMRC. The practical effect for a subcontractor:
- Register and the contractors who pay you deduct 20% from your labour.
- Don't register and they must deduct 30%.
Both rates are an advance on your eventual tax bill — you are not losing the money permanently, you reclaim any over-deduction through your tax return. But the unregistered rate ties up an extra 10% of your labour income with HMRC for months for no reason. Registering is the obvious move.
For a contractor, registration is mandatory before you take on subcontractors — you cannot legitimately operate CIS deductions and returns without it.
Verification, deductions and the monthly return
The contractor's core CIS cycle:
- Verify each new subcontractor with HMRC before the first payment. Verification returns the correct deduction rate (20%, 30% or gross).
- Split the invoice — identify the labour element (subject to deduction) separately from materials, VAT and any excluded costs. Deduct only from the labour.
- Deduct at the verified rate and pay the subcontractor the net figure.
- Issue a payment and deduction statement to the subcontractor for each tax month, showing gross, materials, and tax deducted.
- File the monthly CIS return with HMRC by the 19th of the month, listing all subcontractors paid and deductions made, and pay the deductions over to HMRC.
Miss a monthly return and the fixed penalties stack up quickly, even for a nil return where you should have filed one. Get the labour/materials split wrong and you under- or over-deduct, creating a liability or a dispute.
Materials, VAT and what is NOT deducted from
This is the most common on-site argument and it is genuinely simple: CIS is deducted from labour only. When a subcontractor invoices, the deduction is calculated after stripping out:
- Materials the subcontractor genuinely supplied for the job.
- VAT (handled entirely separately — and note the domestic reverse charge below).
- Plant hire in the circumstances HMRC defines.
- Certain other costs per HMRC's rules.
So a subcontractor's invoice should clearly separate labour from materials. If it does not, the contractor may have to deduct from the whole amount, costing the subcontractor cash flow. A clean, itemised invoice protects the subcontractor.
Gross payment status
A subcontractor who meets HMRC's three tests — a business test (genuinely carrying on a construction business through a bank account in the UK), a turnover test (labour turnover above a set threshold), and a compliance test (a clean record of filing returns and paying tax on time) — can apply for gross payment status. Contractors then pay them in full with no deduction, and the subcontractor settles all their tax through their own return. It is a significant cash-flow advantage for established businesses, but it comes with the responsibility of staying compliant — HMRC reviews the status and can withdraw it.
The VAT domestic reverse charge
Closely tied to CIS: for most B2B supplies of construction services that fall within CIS, between VAT-registered businesses, the VAT domestic reverse charge applies — the customer accounts for the VAT to HMRC instead of the supplier charging it. The supplier's invoice states that the reverse charge applies and shows no VAT to be paid to them. It is a separate rule from CIS deductions but operates on the same population of work, so the two are usually dealt with together. See vat for trades for the detail.
Frequently Asked Questions
Do I have to register for CIS?
If you are a contractor — meaning your business pays subcontractors for construction work — you must register before you take any on. If you are a subcontractor, registration is not strictly compulsory, but if you do not register, contractors must deduct 30% from your labour instead of 20% — so not registering simply means lending HMRC an extra 10% of your labour income until your tax return. Registration is free and quick. For practical purposes, anyone working in construction should be registered in the appropriate role(s).
Is CIS deducted from the whole invoice or just the labour?
Just the labour. CIS deductions are calculated on the labour element only — materials genuinely supplied by the subcontractor, VAT, and plant hire (in defined circumstances) are all excluded. This is why a subcontractor's invoice should clearly itemise labour separately from materials: if the split is not clear, the contractor may have to deduct from the full amount, unfairly hitting the subcontractor's cash flow. A clean, itemised invoice is in the subcontractor's own interest.
Does being on CIS mean I'm self-employed and not an employee?
No — CIS does not determine employment status. It is purely a tax-collection mechanism. A worker can be treated as a CIS subcontractor and still, in reality, be an employee under employment-status tests — and if HMRC decides the relationship was really employment, the "contractor" can face PAYE and NI liabilities regardless of CIS having been operated. CIS and employment status are separate questions; operating CIS correctly does not make a disguised employee genuinely self-employed.
What is gross payment status and should I apply for it?
Gross payment status lets a subcontractor be paid in full with no CIS deduction, settling all their tax through their own return — a real cash-flow benefit. To get it you must pass HMRC's business, turnover and compliance tests, the last of which requires a clean history of on-time returns and payments. It suits established subcontractors with the turnover and the discipline to stay compliant. If your filing and payment record is patchy, applying is premature — and HMRC can withdraw the status if compliance slips.
Regulations & Standards
Finance Act 2004, Chapter 3 — the primary legislation establishing the Construction Industry Scheme.
Income Tax (Construction Industry Scheme) Regulations 2005 — the detailed operating rules for verification, deductions, returns and statements.
VAT (Section 55A) — domestic reverse charge for building and construction services — the related VAT rule applying to CIS-covered B2B supplies.
HMRC CIS340 — the official Construction Industry Scheme guide for contractors and subcontractors.
Finance Acts (annual) — periodically amend CIS rules and thresholds, including gross payment status tests.
GOV.UK — Construction Industry Scheme (CIS) — overview for contractors and subcontractors
GOV.UK — CIS: register as a subcontractor — subcontractor registration and obligations
GOV.UK — CIS: a guide for contractors and subcontractors (CIS340) — the detailed HMRC guide
GOV.UK — VAT domestic reverse charge for construction — the related VAT rule
cis scheme — CIS deduction rates and the contractor/subcontractor split in brief
self employment tax — how CIS deductions are reclaimed through Self Assessment
vat for trades — the VAT domestic reverse charge that runs alongside CIS
subcontracting — managing subcontractors, including verification and payment