CIS Explained: The Complete Guide for Contractors and Subcontractors 2026

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of rules from HMRC that governs how payments are made from contractors to subcontractors in the UK construction industry. Under CIS, contractors must deduct money from subcontractor payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor's tax and National Insurance.

CIS has been in place for decades and applies to a wide range of construction work — from large-scale building projects to smaller jobs like plastering, plumbing, and electrical work. If you work in construction, understanding CIS is not optional. Getting it wrong can lead to penalties, overpayments, and cash flow problems.

Who Needs to Register for CIS?

Contractors

You must register as a contractor with HMRC if you:

• Pay subcontractors working in construction
• Spend more than £3 million a year on construction operations (even if construction is not your main business)
• Are a government body or local authority that commissions construction work

This means that some businesses outside the construction industry — such as property developers, housing associations, and large retailers doing shopfitting work — may also need to register as contractors under CIS.

Subcontractors

If you carry out construction work for a contractor, you should register as a subcontractor. Registration is not strictly mandatory, but failing to register means you will face a higher deduction rate of 30% instead of 20%. There is almost no scenario where it makes sense not to register.

To register, you will need your Unique Taxpayer Reference (UTR), your National Insurance number, and your business details. You can register online via HMRC's CIS service or by calling them directly.

What Work Does CIS Cover?

CIS covers most construction work on permanent or temporary buildings and structures. This includes:

• Site preparation and groundwork
• Building and demolition
• Alterations, repairs, and decorating
• Installing heating, lighting, ventilation, and power systems
• Plumbing and drainage
• Roofing, plastering, and glazing
• Road building and civil engineering

Work That Is Exempt from CIS

Not all work on buildings counts as construction for CIS purposes. Exemptions include:

• Architecture, surveying, and design work
• Scaffolding hire (without labour)
• Carpet fitting
• Delivering materials
• Manufacturing components off-site (unless also installing them)
• Work on your own property (domestic customers are outside CIS)

Understanding these boundaries is important. If you are a contractor paying someone for exempt work, CIS deductions should not be applied. If you are a subcontractor doing exempt work, you should not have CIS deducted from those payments.

CIS Deduction Rates

There are three deduction rates under CIS:

| Rate | Who It Applies To | |------|-------------------| | 0% (Gross) | Subcontractors with Gross Payment Status | | 20% | Registered subcontractors | | 30% | Unregistered subcontractors |

The 20% Standard Rate

Most registered subcontractors have 20% deducted from the labour portion of their invoices. This is the default rate once you have successfully registered and been verified.

The 30% Higher Rate

If a subcontractor is not registered with HMRC for CIS, the contractor must deduct 30% from their payments. This is a significant hit to cash flow, and it is entirely avoidable by registering.

Gross Payment Status (0%)

Subcontractors who meet certain turnover and compliance criteria can apply for Gross Payment Status, which means no deductions are made. We cover this in detail below.

How CIS Deductions Work

When a contractor pays a subcontractor, they must:

1. Verify the subcontractor with HMRC (online or by phone)
2. Calculate the deduction based on the labour portion of the invoice
3. Deduct the correct percentage and pay the remainder to the subcontractor
4. Pay the deduction to HMRC by the 19th of the following month
5. Submit a monthly CIS return to HMRC

Materials Are Excluded

A critical point that many people get wrong: CIS deductions are calculated on the labour element only. The cost of materials that the subcontractor has purchased for the job should be excluded from the deduction calculation.

For example, if a subcontractor invoices £5,000 — with £3,500 for labour and £1,500 for materials — the 20% deduction applies only to the £3,500 labour portion. The deduction would be £700, not £1,000.

Materials must be itemised on the invoice. If they are not, the contractor may have to apply the deduction to the full amount. Subcontractors should always separate labour and materials on their invoices to avoid unnecessary deductions.

CIS Verification

Before making a first payment to a subcontractor, a contractor must verify them with HMRC. Verification tells the contractor which deduction rate to apply. You can verify subcontractors through:

• HMRC's online CIS service — the quickest method
• The CIS helpline — if you cannot use the online service

You will need the subcontractor's legal name (or business name), UTR, and National Insurance number (for sole traders) or company registration number (for limited companies).

HMRC will respond with one of three verification results:

• Gross payment — pay the full amount, no deduction
• Net payment — deduct 20%
• Unmatched — HMRC cannot match the details, deduct 30%

An unmatched result usually means the subcontractor has provided incorrect details or is not registered. The contractor must still make the payment but at the 30% rate.

Monthly CIS Returns

Contractors must submit a CIS return to HMRC every month, even if no payments were made to subcontractors in that period (a nil return). The return is due by the 19th of the following month.

The return must include:

• Details of all subcontractors paid during the month
• The gross amount, materials deducted, and the CIS deduction for each subcontractor
• A declaration that the employment status of each subcontractor has been considered

Late filing attracts an immediate £100 penalty, with further penalties if the return remains outstanding.

CIS and Self Assessment

For subcontractors, CIS deductions are not a final tax. They are advance payments towards your income tax and National Insurance liability. When you complete your Self Assessment tax return, you include:

• Your total gross income from construction work
• The total CIS deductions that were made from your payments

If the CIS deductions exceed your tax liability, you can claim a refund from HMRC. Many subcontractors receive refunds because CIS deductions may be more than the tax they actually owe — particularly if they have significant allowable expenses.

You should keep all CIS payment and deduction statements from your contractors, as these serve as evidence of the deductions made.

Gross Payment Status

Gross Payment Status (GPS) allows subcontractors to receive payments without any CIS deductions. This is a significant advantage for cash flow, as you keep the full payment amount and settle your tax through Self Assessment.

Qualifying for GPS

To qualify, you must meet three tests:

1. Business test — You carry on a construction business in the UK
2. Turnover test — Your annual turnover from construction work meets the minimum threshold (£30,000 for sole traders, or £30,000 per partner/director)
3. Compliance test — You have filed all tax returns on time, paid all tax on time, and have no outstanding tax debts

The compliance test is the one that catches most people out. Even a single late Self Assessment return or missed payment can disqualify you.

Maintaining GPS

HMRC reviews Gross Payment Status annually. If you fail the compliance test at review time, your GPS can be withdrawn. You will be given notice and a chance to appeal, but prevention is better than cure — stay on top of all your tax obligations.

CIS for Limited Companies

Limited companies working as subcontractors are also within the scope of CIS. The company must be verified by the contractor using its company registration number and UTR. Deductions are applied to the company's payments, and these can be offset against the company's Corporation Tax, PAYE, or National Insurance liabilities.

Limited companies acting as contractors have the same obligations as any other contractor — verify subcontractors, make deductions, file monthly returns, and pay deductions to HMRC.

CIS and VAT: The Domestic Reverse Charge

Since March 2021, the VAT domestic reverse charge applies to most CIS-regulated construction services between VAT-registered businesses. Under the reverse charge:

• The subcontractor does not charge VAT on their invoice
• The contractor accounts for VAT through their own VAT return (both output and input tax)

The reverse charge does not apply to end users or intermediaries connected with end users. It also does not apply to supplies of materials only, or to work that is not within the scope of CIS.

This rule was introduced to combat VAT fraud in the construction supply chain and has significant implications for how invoices are prepared and how VAT returns are completed.

Penalties for Getting CIS Wrong

HMRC takes CIS compliance seriously. Penalties can include:

• Late filing — £100 per month for each month (or part month) a return is late, up to 12 months. After 12 months, additional penalties of up to £3,000 or 100% of the deductions can apply.
• Incorrect returns — penalties based on the amount of tax at stake and whether the error was careless or deliberate.
• Failure to register — not a specific penalty, but HMRC may charge penalties for incorrect filing if deductions are not made properly.
• Failure to verify — if you do not verify a subcontractor and apply the wrong deduction rate, you may be liable for any shortfall.

Record Keeping Requirements

Both contractors and subcontractors must keep detailed records. Contractors should retain:

• Details of all payments made to subcontractors
• Verification records
• Copies of all CIS returns submitted
• Copies of all payment and deduction statements issued

Subcontractors should retain:

• All payment and deduction statements received
• Records of income and expenses
• Invoices issued, clearly showing labour and materials

Records must be kept for at least six years — the same period as general tax records.

How Accounted Helps with CIS

Managing CIS manually is time-consuming and error-prone. Accounted automates key parts of the process:

• Track CIS deductions as they happen, matched to your bank transactions
• Separate labour and materials automatically when recording CIS payments
• Calculate your CIS refund as part of your Self Assessment preparation
• Store payment and deduction statements digitally, ready for HMRC enquiries
• Penny, your AI bookkeeper, understands CIS rules and will prompt you for materials information when recording construction payments

If you are a contractor or subcontractor looking to simplify your CIS compliance, explore our plans and see how Accounted can save you hours each month.

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