The Construction Industry Scheme (CIS): A Plain Guide for Subcontractors and Contractors

If you work in UK construction, the Construction Industry Scheme (CIS) touches almost every payment you send or receive. For a subcontractor it decides how much of each invoice lands in the bank. For a contractor it adds a verification step before paying anyone new, a statement to issue every month and a return with a fixed deadline and automatic penalties.

This guide explains how CIS works for both sides, using HMRC's own guidance as it stood at the time of writing (October 2026). It is an explanation, not tax advice: how the rules apply to you depends on your business structure and contracts, so check the detail with your accountant or adviser.

What CIS is and who it covers

Under CIS, contractors deduct money from subcontractors' payments and pass it to HMRC, and those deductions count as advance payments towards the subcontractor's tax and National Insurance.¹ It is not a separate tax. It is a way of collecting the subcontractor's own tax as the work is paid for.

You must register as a contractor if you pay subcontractors for construction work, or if your business does not do construction work but has spent more than £3 million on construction in the 12 months since your first payment.¹ The second group are called deemed contractors and include housing associations, local authorities and government departments. Builders, labour agencies, gangmasters and property developers are mainstream contractors.² If you both pay subcontractors and work for contractors, you register as both.

The scheme covers most work on permanent or temporary buildings and structures and on civil engineering such as roads and bridges, including site preparation, demolition, building, alterations, repairs, decorating and installing heating, lighting, power, water and ventilation systems.¹ HMRC's detailed guide lists earth-moving, excavation, tunnelling, laying foundations and access roadworks, so groundworks and drainage firms are firmly inside it.³ Architecture and surveying, scaffolding hire without labour, carpet fitting, making or delivering materials and non-construction site services such as running a canteen are outside it.¹

CIS only applies to self-employed subcontractors. Employment status is decided under common law, and it is the contractor's job to consider it when the subcontractor is first engaged; working self-employed before does not settle it.³

Registering as a subcontractor

Sole traders, limited company owners and partners who work for a contractor should register.⁴ You need your legal business name, your Unique Taxpayer Reference (UTR), your VAT number if you have one and the date you started trading, and possibly your National Insurance number or company registration number. If you have no UTR yet, registering for Self Assessment as a new business and choosing "working as a subcontractor" registers you for both at once.⁴

Registration is not compulsory for subcontractors, but skipping it is expensive. The difference shows up on every payment:

Those rates come from HMRC's subcontractor and contractor guidance.⁴ When you start with a new contractor, give them exactly the details you registered with, including your UTR and legal or trading name. If the details do not match, the contractor cannot verify you and the 30% rate applies.⁴

How the deduction is worked out

The percentage is not taken from the whole invoice. The contractor starts from the gross invoice and first takes off VAT and what the subcontractor actually paid for materials, consumable stores, fuel (except for travelling), plant hired for the job and manufacturing or prefabricating materials. The CIS percentage is then applied to what is left.² Plant the subcontractor owns does not count as plant hire, though fuel used in it can be treated as materials.³ Travel and subsistence paid to the subcontractor stay in the amount the deduction is taken from.³

The contractor can ask for receipts for materials, and must check and keep records so the materials figure is not overstated. If it looks excessive, HMRC may recover the under-deduction from the contractor.³ That reverse charge is worth knowing about too: the VAT domestic reverse charge applies to most standard and reduced rate construction services between VAT-registered businesses that are reported within CIS.⁵

Gross payment status: the tests and the 2026 changes

Gross payment status means contractors pay you in full and you settle all your tax and National Insurance at the end of the year. To qualify you have to show HMRC that you have paid tax and National Insurance on time in the past, that the business does construction work (or provides labour for it) in the UK, and that it is run through a bank account.⁴ There is also a turnover test, based on the last 12 months and ignoring VAT and materials:

• £30,000 for a sole trader.
• £30,000 for each partner, or at least £100,000 for the whole partnership.
• £30,000 for each director, or at least £100,000 for the whole company.
• £30,000 for each person where a company is controlled by five people or fewer.

Those thresholds are from HMRC's subcontractor guidance.⁴ Since 6 April 2024 the compliance test has also covered VAT filing and payment, and the first review of a new holder's compliance comes after 6 months rather than 12.⁶ After that HMRC reviews holders every year and allows only a small amount of late payments or returns. If you fail, HMRC writes first; if your explanation is not accepted it withdraws the status in 90 days, you have 30 days to appeal, and you normally wait a year before reapplying.⁴

The bigger change came on 6 April 2026. HMRC can now immediately remove gross payment status where a business knew or should have known that a transaction was connected to the fraudulent evasion of tax, make that business liable for the lost tax and charge a penalty of up to 30% of it, which can extend to its officers.⁷ Where status is removed for fraud or serious non-compliance, the business cannot reapply for five years instead of one.⁷ HMRC's policy paper says the measure targets businesses that knowingly engage with fraudulent supply chains, and that compliant firms doing proper due diligence should not be affected.⁸ In practice that means keeping a record of the checks you made on who you subcontract to.

What contractors must do every month

Contractors register through the new employer process, and HMRC sets up a combined PAYE and CIS scheme.² From then on the obligations follow the tax month, which runs from the 6th of one month to the 5th of the next.³

Verify before the first payment

Before paying a new subcontractor you verify them with HMRC, which tells you whether they are registered and which rate to use. You do not need to verify someone you have included on a CIS return in the current or previous two tax years. You can verify through HMRC's free CIS online service or commercial CIS software, but verifying more than 50 subcontractors needs commercial software.² If HMRC cannot match a subcontractor, it gives a verification reference with letters on the end, which must go on the monthly return and on the subcontractor's statement wherever the 30% rate is used.³

Give payment and deduction statements

Every subcontractor you deducted from must get a statement within 14 days of the end of the tax month, so by the 19th. It must show your name and employer reference, the tax month or payment date, the subcontractor's name and UTR, the gross amount, the materials figure that reduced the deduction and the amount deducted. It can be electronic if both sides agree and the subcontractor can store and print it.³ Failing to give statements, or giving wrong ones negligently or deliberately, can cost up to £3,000.³

File the monthly return and pay HMRC

The monthly return lists every payment to every subcontractor in the tax month, whether paid gross or under deduction, and must reach HMRC by the 19th.³ On it you declare that the subcontractors listed are not employees, and getting a subcontractor's employment status wrong on the return can bring a penalty of up to £3,000.² The deductions are due by the 22nd if you pay electronically (the 19th by post), alongside PAYE.² If you did not make a deduction you should have, you still owe HMRC the amount.³

Since 6 April 2026, mainstream contractors who paid no subcontractors in a month must either file a nil return or notify HMRC of a period of inactivity by the 19th, or a penalty is due.³ HMRC reinstated the nil return, dropped in 2015, because the old arrangement left contractors with penalties that in many cases were not actually owed.⁹

Returns later than 12 months can attract a further penalty of up to £3,000 or 100% of the deductions on the return, whichever is higher, and you have 30 days from the penalty notice to appeal.² Contractors must keep records of gross payments, deductions and materials for at least 3 years after the end of the tax year, and can be fined up to £3,000 for not producing them.²

Reclaiming deductions as a subcontractor

Deductions are credited against your tax bill, so the statements are worth as much as the payments. Sole traders and partners put their total pay before deductions as income and the total deductions as CIS deductions on their Self Assessment return, and HMRC refunds any overpayment; any tax still owed is due by 31 January after the end of the tax year.⁴

Limited companies work differently. They set their CIS deductions against the PAYE, National Insurance, Student Loan and CIS amounts they owe each month or quarter, shown on the Employer Payment Summary, and must not use the Corporation Tax return to do it.⁴ Any excess carries forward within the tax year and can be reclaimed once the year has ended, online for the past 6 tax years, as long as all payroll submissions, CIS returns and Company Tax Returns are in.¹⁰ HMRC checks claims against what contractors reported and asks for statements and bank records if they do not match.¹⁰ If you cannot get statements because a contractor has gone out of business, you can write to HMRC with the contractor's details and payment dates.⁴

Common CIS admin mistakes

These are the points in HMRC's guidance where a small slip costs money or time:

• Details that do not match. A trading name instead of the legal name, or a temporary National Insurance number, means the subcontractor cannot be verified and 30% is deducted.²
• Materials taken off without evidence. If the materials figure is overstated, the under-deduction can come back to the contractor.
• Owned plant treated as hire. Only plant hired from a third party can be taken off before the deduction.
• Statements late or missing. Subcontractors need them to reclaim, and HMRC can fine contractors for not issuing them.
• No return in a quiet month. Since April 2026 a mainstream contractor with no payments still needs a nil return or an inactivity notice.
• Retentions released on old assumptions. A retention is treated like any other payment, based on the subcontractor's status when it is paid, not when the work was done.³
• Deductions that never get reconciled. A company that does not match statements to its payroll submissions leaves money sitting with HMRC until someone files a claim.

Where software takes the repetitive work away

Almost none of this needs judgement once it is set up. The same steps repeat every tax month: check whether each new subcontractor needs verifying, work out the deduction from the invoice, issue statements, file the return by the 19th, pay by the 22nd and match the figures to the ledger. Each subcontractor paid under deduction means a calculation, a statement and a line on the return every month, each with a fixed format and a deadline.

Most payroll and accounting packages include CIS, and for a straightforward business that is the place to start: commercial CIS software can verify subcontractors and file returns directly with HMRC.² The gaps usually appear around the edges, where invoices arrive by email, materials receipts sit in a site manager's van and the subcontractor list lives in a spreadsheet separate from the accounts. That is where retyping and missed months creep in.

A simple custom workflow can close those gaps without replacing your accounting system: an invoice is captured once, the materials evidence is attached to it, the deduction is worked out and checked, the statement is generated and sent, and the figures flow into the return and the ledger. For subcontractors, the same approach can match every statement received against the bank and keep the year's deductions ready for the refund claim. It sits alongside the wider site-to-office admin we cover in where civils contractors lose time to admin.

If you want to put a number on the time this takes before deciding anything, our manual cost calculator estimates what repetitive admin costs a year.

Clean CIS records also help when larger contractors check you out. Main contractors look at tax compliance alongside pre-qualification, which we cover in Constructionline, CHAS and PAS 91 and getting onto a tier 1 supply chain.