What is the Construction Industry Scheme? Plain English Guide

The Accounted Business Team·1 February 2026·7 min read

If you work in construction, you have probably heard of CIS. Maybe someone has already started deducting money from your payments and you want to understand why. Or maybe you are about to start subcontracting and want to know what you are getting into.

This guide explains the Construction Industry Scheme from scratch, in plain English, without the jargon that HMRC seems to love.

What Is CIS in One Sentence?

The Construction Industry Scheme is a system where contractors deduct a percentage of a subcontractor's payment and send it directly to HMRC, like a tax prepayment.

That is it. It is not an extra tax. It is not a fine. It is simply HMRC collecting some of your tax before you get paid, rather than waiting until you file your Self Assessment return.

Why Does CIS Exist?

Construction has historically been an industry with a lot of cash payments and, frankly, a lot of tax avoidance. Workers would get paid cash in hand and never declare it. HMRC got tired of chasing people, so they created a system where the tax is collected at source — before it even reaches the worker's pocket.

The idea is simple: if 20% of every payment goes straight to HMRC, the subcontractor's tax bill at the end of the year is mostly already paid. Less chasing, less avoidance, less hassle for everyone.

Who Does CIS Affect?

CIS involves two parties: contractors and subcontractors.

Contractors

A contractor is any business that pays subcontractors for construction work. This includes:

Construction companies
Builders who hire other tradespeople
Property developers
Government departments and local authorities
Housing associations

You are also classed as a contractor if you spend more than £3 million on construction over a 3-year period, even if construction is not your main business. This catches large organisations that commission building work.

Subcontractors

A subcontractor is anyone who does construction work for a contractor. This includes:

Bricklayers, plasterers, plumbers, electricians, carpenters
Roofers, scaffolders, painters and decorators
Groundworkers and labourers
Demolition workers
Any other trade that falls under HMRC's definition of "construction operations"

You can be both a contractor and a subcontractor at the same time. For example, a plumbing company that hires additional plumbers for a big job is a contractor (paying subcontractors) and might also be a subcontractor (if they are working for a main contractor on a larger project).

Who Is NOT Covered?

CIS does not apply to employees (PAYE covers them), non-construction work, professional services like architects and surveyors (unless they are doing physical construction), or domestic homeowners hiring tradespeople directly for home repairs.

How Do CIS Deductions Work?

When a contractor pays a subcontractor, they do not pay the full invoice. They deduct a percentage and send it to HMRC on the subcontractor's behalf.

The Deduction Rates

There are three possible rates:

| Status | Deduction Rate | |--------|---------------| | Registered subcontractor | 20% | | Unregistered subcontractor | 30% | | Gross payment status | 0% |

20% — The Standard Rate

If you are registered with HMRC as a CIS subcontractor, 20% of the labour element of your payment is deducted. We will come back to the "labour element" bit in a moment — it is important.

30% — The Unregistered Rate

If you are not registered for CIS and a contractor pays you for construction work, they must deduct 30%. This is HMRC's way of encouraging everyone to register. The difference between 20% and 30% is significant over a year.

0% — Gross Payment Status

Some established subcontractors qualify for gross payment status, which means they get paid in full with no deductions. To qualify, you typically need:

A track record of paying your tax on time
A minimum turnover (£30,000 for sole traders)
No outstanding tax debts

Gross payment status is worth applying for once your business is established, but most subcontractors start at the 20% rate.

The Labour vs Materials Split

This is the bit that catches people out. CIS deductions are only applied to the labour portion of a payment, not the materials.

If you invoice a contractor for £1,000 and that breaks down as £700 labour and £300 materials, the 20% deduction is applied to £700, not £1,000.

Deduction: 20% of £700 = £140
You receive: £1,000 - £140 = £860
HMRC receives: £140

This is why it is important to show the materials cost separately on your invoices. If you do not break out materials, the contractor has to apply the deduction to the full amount, and you lose more money upfront.

Make sure your invoices clearly show:

Total invoice amount
Cost of materials (with evidence if possible)
Labour cost
CIS deduction amount
Net payment amount

How Does the Contractor Verify You?

Before paying you for the first time, the contractor must verify you with HMRC. They do this through HMRC's online service by providing your:

Name or business name
Unique Taxpayer Reference (UTR)
National Insurance number (for sole traders)

HMRC tells the contractor what deduction rate to apply (20%, 30%, or 0%). The contractor cannot choose the rate — HMRC sets it based on your registration status.

The contractor must verify you before each tax year. They cannot just assume last year's rate still applies.

Monthly Returns and Deduction Statements

Contractors must file a monthly CIS return with HMRC by the 19th of each month, listing which subcontractors were paid, how much, and how much was deducted. They must also give each subcontractor a written deduction statement — similar to a payslip. Late filing triggers a £100 penalty per month.

How Do Subcontractors Get Their Money Back?

This is the question everyone asks. If 20% of your pay is going to HMRC, how do you get it back?

The CIS deductions are treated as advance payments of your income tax and National Insurance. When you file your Self Assessment tax return at the end of the year, the deductions are credited against your actual tax bill.

Scenario 1: Deductions Are More Than Your Tax Bill

If your CIS deductions exceed your actual tax liability (which is common if you have significant expenses to claim), HMRC refunds the difference. This is why filing your Self Assessment is so important for CIS subcontractors — it is how you get your money back.

For example:

Total CIS deductions during the year: £6,000
Actual tax and NI bill: £4,000
HMRC refunds you: £2,000

Scenario 2: Deductions Are Less Than Your Tax Bill

If your CIS deductions do not cover your full tax bill (for example, if you had other income or very few expenses), you pay the difference through Self Assessment.

Total CIS deductions during the year: £4,000
Actual tax and NI bill: £6,000
You pay HMRC: £2,000

Keep Your CIS Deduction Statements

You need your deduction statements from contractors to prove how much was deducted. Without them, HMRC may not credit the deductions against your tax bill, and getting them reissued can be a slow process. Keep every single one.

How to Register for CIS

You can register as a subcontractor online at gov.uk or by calling HMRC on 0300 200 3210. You will need your National Insurance number, your UTR, and your name and address. Registration is free and takes a few minutes. Once registered, your deduction rate drops from 30% to 20%.

If you are a contractor, you must register before you take on your first subcontractor. You can register through your HMRC online account or by calling the CIS helpline.

Common CIS Mistakes

Not Registering

Working unregistered means 30% deductions instead of 20%. On £50,000 of labour payments over a year, that is £5,000 more going to HMRC upfront. Register.

Not Splitting Labour and Materials

If your invoice does not show materials separately, the contractor deducts 20% from the whole amount. Always itemise materials.

Not Filing Self Assessment

If you do not file your tax return, HMRC keeps all your CIS deductions. They will not refund you automatically. You must file to get your money back.

Not Keeping Deduction Statements

Without your statements, you cannot prove what was deducted, and HMRC may not credit you.

How Accounted Helps With CIS

CIS adds a layer of admin that most tradespeople would rather not deal with. Accounted is built to handle it. Penny tracks your CIS deductions throughout the year, keeps a running total of what has been sent to HMRC on your behalf, and calculates your estimated tax refund or bill in real time. When it is time to file your Self Assessment, your CIS figures are ready.

If you are a subcontractor in construction and want to stop worrying about deductions, statements, and tax refunds, start your free trial of Accounted. Penny understands CIS inside and out.

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