The Construction Industry Scheme (CIS) places a set of obligations on contractors who pay subcontractors for construction work in the UK. As a contractor, you are responsible for verifying subcontractors with HMRC, making the correct deductions from their payments, paying those deductions to HMRC, and filing monthly returns.
Getting CIS wrong as a contractor is expensive. If you fail to deduct the correct amount or miss your filing obligations, HMRC holds you liable for the shortfall, plus penalties and interest. This guide covers every contractor obligation under CIS so you know exactly what is required.
Who Is a Contractor Under CIS?
You are a contractor for CIS purposes if:
- You are a business in the construction industry that pays subcontractors to carry out construction work
- You are a business outside the construction industry but your annual spend on construction work exceeds £3 million in any 12-month period
Both of these types of contractor must register for CIS and comply with all contractor obligations. The £3 million threshold catches businesses such as property developers, local authorities, and large retailers who commission significant construction work even though construction is not their primary business.
| Contractors and subcontractors can be the same business Many construction businesses are both contractors and subcontractors simultaneously. You may subcontract work to others while also being subcontracted by a larger main contractor. CIS obligations apply in both directions: you must deduct from those below you in the chain and have deductions made from payments you receive from those above you. |
Contractor Obligations Under CIS: The Full List
| Obligation | When It Applies | Consequence of Failure |
| Register as a contractor with HMRC | Before making your first CIS payment | Penalty and liability for undeducted tax |
| Verify each new subcontractor with HMRC | Before the first payment to each subcontractor | Wrong deduction rate applied, contractor liable for shortfall |
| Deduct the correct amount from labour payments | Every time you pay a subcontractor | Contractor liable for any under-deduction plus penalties |
| Pay deductions to HMRC | By 19th of the month following the payment (22nd electronically) | Interest and late payment surcharges |
| File a monthly CIS return | By 19th of each month for the previous month’s payments | Automatic penalties for late or incorrect returns |
| Issue deduction statements to subcontractors | Within 14 days of the end of each tax month | Subcontractors cannot verify their own position |
Step 1: Register as a Contractor
Before you make your first payment to a subcontractor, you must register as a CIS contractor with HMRC. You can do this online through your Government Gateway account or by calling HMRC’s CIS helpline on 0300 200 3210.
Once registered, HMRC issues you with a CIS contractor reference number. You use this reference when filing monthly returns and making payments.
Step 2: Verify Every Subcontractor Before Paying Them
Before you make the first payment to any subcontractor, you must verify them with HMRC. Verification tells you which deduction rate to apply:
| Verification Outcome | Deduction Rate to Apply |
| Subcontractor verified and registered for CIS | 20% |
| Subcontractor verified and holds gross payment status | 0% (no deduction) |
| Subcontractor cannot be verified by HMRC | 30% |
You verify subcontractors through your Government Gateway account or using CIS-compatible payroll or accounting software. HMRC returns the verification result in real time.
You only need to verify a subcontractor once unless there is a gap of two or more tax years since you last paid them. If you paid the same subcontractor in the previous tax year, you do not need to re-verify them at the start of each new year.
Step 3: Calculate and Apply the Correct Deduction
CIS deductions apply only to the labour element of a subcontractor’s invoice. Materials and equipment supplied by the subcontractor are excluded from the deduction calculation.
Here is how to calculate the deduction:
Step 1. Take the total invoice amount from the subcontractor.
Step 2. Subtract the cost of any materials they are supplying and charging for separately on the invoice.
Step 3. Apply the verified deduction rate (0%, 20%, or 30%) to the remaining labour element only.
Step 4. Pay the subcontractor the net amount (invoice total minus the deduction).
Step 5. Pay the deducted amount to HMRC by the 19th of the following month.
Example: a subcontractor invoices £3,000 for labour and £800 for materials. The contractor deducts 20% of the £3,000 labour element only, which is £600. The subcontractor receives £2,400 plus the full £800 for materials. The contractor pays £600 to HMRC.
What counts as materials?
Materials must be separately itemised on the subcontractor’s invoice to be excluded from the deduction. HMRC expects the split between labour and materials to reflect the actual costs. If a subcontractor bundles labour and materials together without separating them, HMRC may treat the full amount as subject to CIS deduction.
Step 4: File Monthly CIS Returns
Every month in which you make CIS payments to subcontractors, you must file a monthly return with HMRC by the 19th of the following month. The return covers the previous tax month, which runs from the 6th of one month to the 5th of the next.
Your monthly return must include:
- Each subcontractor paid during the month
- The gross amount paid to each subcontractor
- The amount deducted from each payment
- The verification number for each subcontractor
You file monthly returns through your Government Gateway account or through CIS-compatible software. If you made no payments in a particular month, you must still file a nil return to confirm this to HMRC.
Penalties for late or missing monthly returns
| Lateness | Penalty Per Return |
| 1 to 2 months late | £100 |
| 2 to 6 months late | £200 |
| 6 to 12 months late | £300 or 5% of the CIS deductions due, whichever is higher |
| Over 12 months late | £3,000 or 100% of the CIS deductions due, whichever is higher |
Step 5: Issue CIS Deduction Statements to Subcontractors
Within 14 days of the end of each tax month, you must give each subcontractor a written statement showing what you paid them and what you deducted. This is commonly called a CIS deduction statement or a payment and deduction statement.
The statement must include:
- The contractor’s name and employer’s tax reference
- The subcontractor’s name and UTR
- The tax month the statement relates to
- The gross amount paid
- The amount deducted
Subcontractors need these statements to complete their Self Assessment returns and claim back any overpaid CIS deductions at year end. Failing to issue them creates problems for your subcontractors and puts you in breach of your CIS obligations.
When Does CIS Apply to Your Payments?
Not every payment to a person working in construction is subject to CIS. The scheme applies specifically to construction operations as defined by HMRC. CIS covers:
- Construction, alteration, repair, extension, demolition, and dismantling of buildings and structures
- Installation of systems such as heating, lighting, power, water, and ventilation
- Internal cleaning as part of construction work
- Painting and decorating of buildings
- Civil engineering works
CIS does not apply to:
- Architecture and surveying
- Scaffolding hire without labour
- Carpet fitting
- Manufacture of materials and components off-site
- Drilling for oil or gas
Frequently Asked Questions
Do I need to register for CIS if I occasionally use subcontractors?
Yes. If you pay subcontractors for construction work in the UK, you must register as a CIS contractor before making your first payment to them. There is no minimum spend threshold for construction businesses. The £3 million threshold applies only to businesses outside the construction industry.
What happens if I apply the wrong deduction rate?
If you deduct too little from a subcontractor’s payment, HMRC holds you liable for the shortfall. You cannot recover the underpayment from the subcontractor after the fact. If you deduct too much, the subcontractor receives less than they should and you hold an excess that must be paid over to HMRC. Getting verification right before each first payment eliminates this risk.
Can I use accounting software to manage CIS?
Yes. Most small business accounting software including Xero, QuickBooks, and Sage handles CIS verification, deduction calculations, monthly return filing, and deduction statement generation. Using CIS-compatible software significantly reduces the manual burden and the risk of errors.
What is the difference between a CIS contractor and a CIS subcontractor?
A CIS contractor is a business that pays others to carry out construction work and is responsible for making CIS deductions from those payments. A CIS subcontractor is a business or individual that is paid by a contractor for construction work and has deductions made from their payments. Many businesses are both simultaneously, operating as a subcontractor to a main contractor while also subcontracting some work to others.
Do I have to file a monthly CIS return even if I made no payments?
Yes. If you are registered as a CIS contractor, you must file a monthly return every month, even if you made no payments to subcontractors that month. A nil return confirms to HMRC that no payments were made. Failing to file a nil return carries the same penalties as failing to file when payments were made.
Let M&B Tax Services Handle Your CIS Obligations
M&B Tax Services manages CIS compliance for contractors across the UK. We handle subcontractor verification, monthly return filing, deduction statement preparation, and payment calculations so you stay compliant without the admin burden.
We are ICB-regulated accountants based in Rugby. CIS penalties accumulate quickly when obligations are missed. Outsourcing CIS management to an accountant costs far less than a single penalty notice.
Book a free 30-minute call and we will review your current CIS setup and confirm everything is being handled correctly.
Joanna Bruty
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