CIS stands for the Construction Industry Scheme. It is a HMRC tax scheme that requires contractors to deduct money from subcontractor payments and send those deductions directly to HMRC. The deductions count as advance payments toward the subcontractor’s tax and National Insurance bill.
If you work in construction, whether as a contractor hiring subbies or as a subcontractor getting paid, CIS affects how you get paid and how much you keep.
Who Does CIS Apply To?
CIS applies to anyone working in the construction industry in the UK. That includes:
- Contractors who pay subcontractors for construction work
- Subcontractors who are paid by contractors
- Businesses outside construction that spend more than £3 million on construction in any 12-month period
It does not apply to employees on PAYE. CIS is specifically for self-employed subcontractors and limited company directors working in construction.
How Does CIS Work in Practice?
Here is the basic flow:
Step 1. Registration Both contractors and subcontractors must register with HMRC for CIS before work begins. Contractors register so they can make deductions. Subcontractors register so HMRC can set their deduction rate.
Step 2. Verification Before a contractor pays a subcontractor for the first time, they must verify the subcontractor with HMRC. HMRC then tells the contractor which deduction rate to apply.
Step 3. Deduction The contractor deducts the correct percentage from the subcontractor’s payment (labour only, not materials) and pays the net amount to the subcontractor.
Step 4. Payment to HMRC The contractor pays the deducted amount to HMRC, usually by the 19th of the following month.
Step 5. Monthly Returns Contractors must submit a CIS monthly return to HMRC showing what was paid and what was deducted.
What Are the CIS Deduction Rates?
HMRC sets three deduction rates depending on the subcontractor’s registration status:
| Status | Deduction Rate |
| Registered subcontractor | 20% |
| Unregistered subcontractor | 30% |
| Gross payment status | 0% |
20% rate applies to subcontractors who are registered with HMRC for CIS.
30% rate applies when HMRC cannot verify the subcontractor. This usually happens because they are not registered or their details do not match HMRC records.
0% (gross payment status) is available to subcontractors who meet HMRC’s turnover and compliance tests. This means no deductions at all. You receive the full payment and handle your own tax.
What Counts as a CIS Deduction?
Deductions only apply to the labour portion of an invoice. Materials are excluded.
So if a subcontractor invoices £2,000 for labour and £500 for materials, the contractor deducts 20% of £2,000 only, which is £400. The subcontractor receives £1,600 plus the full £500 for materials.
Getting this wrong is one of the most common CIS mistakes. Always separate labour and materials clearly on your invoices.
How Do Subcontractors Claim Back CIS Deductions?
CIS deductions are not a final tax. They are payments on account toward your tax bill.
At the end of the tax year, you declare your income through Self Assessment. HMRC calculates your actual tax liability and offsets the CIS deductions already made. If more was deducted than you owe, HMRC refunds the difference.
This is why keeping records of every CIS statement (the deduction voucher your contractor gives you) matters. Without them, you cannot prove what has already been paid.
If you are a limited company, you can offset CIS deductions against PAYE and National Insurance owed to HMRC instead of waiting for a Self Assessment refund.
Do I Need to Register for CIS?
As a contractor: Yes, you must register for CIS before making your first payment to a subcontractor. Failing to register or deduct correctly can result in penalties from HMRC.
As a subcontractor: You do not have to register, but if you do not, contractors will deduct 30% instead of 20% from your payments. Registering costs nothing and saves you money immediately.
Common CIS Mistakes to Avoid
- Not verifying a subcontractor before the first payment
- Deducting from materials as well as labour
- Missing the monthly return deadline (19th of each month)
- Not issuing deduction statements to subcontractors
- Failing to keep records of CIS payments received
HMRC takes CIS compliance seriously. Late or incorrect returns carry penalties starting at £100 and rising quickly.
Frequently Asked Questions About CIS
What does CIS stand for?
CIS stands for Construction Industry Scheme. It is a HMRC scheme that governs how tax is handled for contractors and subcontractors in the UK construction industry.
Is CIS the same as self assessment?
No. CIS and self assessment are separate systems, but they connect at year end. CIS deductions made throughout the year are offset against your self assessment tax bill. Many subcontractors end up with a refund because too much was deducted during the year.
What is gross payment status under CIS?
Gross payment status means HMRC allows a subcontractor to receive full payment with no CIS deductions. To qualify, you must pass HMRC’s turnover test, tax compliance test, and business test. It is reviewed annually.
Do limited companies have to register for CIS?
Yes. If a limited company works as a contractor or subcontractor in construction, it must register for CIS just like a sole trader.
Can I reclaim CIS deductions if I overpaid?
Yes. If your CIS deductions exceed your actual tax liability for the year, HMRC will refund the difference after you file your self assessment return. For limited companies, the process goes through PAYE rather than self assessment.
What happens if a contractor does not deduct CIS?
The contractor becomes liable for the full deduction amount and can face penalties. HMRC treats failure to operate CIS correctly as a compliance failure, regardless of whether it was intentional.
Need Help With CIS?
Whether you are a contractor trying to stay compliant or a subcontractor wondering if you are owed a refund, M&B Tax Services handles CIS for construction businesses across the UK.
We are ICB-regulated accountants based in Rugby. We deal with CIS registrations, monthly returns, and end-of-year refund claims so you can focus on the work, not the paperwork.
Book a free 30-minute call and we will tell you exactly where you stand.
Joanna Bruty
- On this page