What is CIS? It stands for the Construction Industry Scheme — a set of HMRC rules that governs how payments are made between contractors and subcontractors in the construction sector. In short, contractors are required to deduct a percentage from the payments they make to subcontractors and pass that money directly to HMRC. Those deductions then count as advance payments towards the subcontractor’s income tax and National Insurance.

CIS tax receipts exceeded £6.3 billion in 2022/23 alone, which gives you a sense of how significant this scheme is. It touches hundreds of thousands of businesses across the UK, from sole traders doing refurbishment work to large groundworks firms running dozens of sites simultaneously.

If you are new to the scheme, or you have been operating in construction for a while and are not entirely sure whether your arrangements are correct, this post should give you a solid foundation — and flag a few areas where it is easy to get things wrong.

The core mechanic of CIS is straightforward. When a contractor pays a subcontractor for construction work, they are required to withhold a portion of the labour element of that payment and send it to HMRC on the subcontractor’s behalf. The subcontractor does not lose that money permanently — it sits as a credit against their tax bill for the year, and if it exceeds what they owe, they can claim a refund.

The standard CIS deduction rate is 20% for registered subcontractors. If a subcontractor has not registered for CIS, the deduction jumps to 30% — a meaningful difference on a significant contract. Subcontractors who meet certain criteria around compliance and turnover can apply for gross payment status, which means the contractor pays them in full with no deduction at all.

It is worth being clear about what CIS does and does not cover. Deductions apply to the labour element of a payment only. If a subcontractor supplies materials as part of a contract, the cost of those materials is excluded — provided the subcontractor directly incurred that cost. This distinction matters for how invoices are structured and how returns are filed.

The scheme exists partly as a mechanism to prevent tax evasion in an industry where cash-in-hand working has historically been common. HMRC collects tax at source rather than waiting for individuals to file returns at year-end.

CIS applies to contractors and subcontractors working in the construction industry. The definitions are broader than many people assume.

Contractors

A contractor under CIS is any business that pays subcontractors to carry out construction work. That includes main contractors, specialist trades firms, and even businesses outside construction if they spend more than £3 million on construction operations within a 12-month period — these are known as deemed contractors, and they have an obligation to register and apply the scheme once that threshold is crossed.

Subcontractors

Subcontractors are any individuals or businesses that carry out construction work for a contractor. That includes sole traders, partnerships, and limited companies alike. Subcontractors do not have to register for CIS, but if they do not, they face the 30% deduction rate rather than the standard 20% — so registration is almost always in their financial interest.

What counts as construction work?

CIS covers most construction work on buildings and civil engineering — site preparation, demolition, building work, alterations, repairs, and decorating all fall within scope. Some activities are excluded, including architecture, surveying, scaffolding hire without labour, carpet fitting, and the delivery of materials. If you are unsure whether a particular type of work is covered, it is worth checking before assuming either way.

When a subcontractor submits an invoice for construction work, the contractor is responsible for verifying the subcontractor’s CIS status with HMRC before making payment. This verification tells the contractor which deduction rate to apply — 0% (gross), 20% (registered), or 30% (unregistered).

Each month, contractors must submit a CIS return to HMRC declaring what payments they have made and what has been deducted. This return must be filed even if no payments were made in a given month. Missing a return triggers automatic penalties — £100 for the first month, rising further if the return remains outstanding.

For subcontractors, the contractor should provide a payment and deduction statement each month, showing what was paid and what was deducted. Subcontractors then use these statements when completing their Self Assessment tax return or their company accounts to claim the deductions as a credit.

One practical point worth flagging: if a subcontractor’s CIS deductions exceed their tax liability for the year, they are entitled to a refund from HMRC. We see clients regularly who have over-deducted across a year and are due money back — the key is making sure the paperwork on both sides is accurate and complete. Disputes can arise when a subcontractor claims a deduction that the contractor has not declared on their own returns, so keeping records clean matters for both parties.

In our experience working with construction businesses, a handful of mistakes come up repeatedly — and the consequences range from penalties to HMRC investigations.

Not registering for CIS

Some subcontractors simply do not register, often because they are new to the industry or were told it was not necessary. As a result, 30% is withheld from every payment rather than 20%. That is an unnecessary cash flow hit, particularly early in a contract when margins may already be tight.

Misclassifying labour and materials

The split between labour and materials on an invoice affects how much CIS is deducted. Inflating the materials element to reduce the CIS deduction looks attractive in the short term but falls squarely into the territory HMRC treats as abuse. The rules are clear: the subcontractor must have directly incurred the cost of the materials for them to be excluded. HMRC has specific powers to investigate and correct these splits, and penalties now extend to anyone who influences or controls the applicant where false information has been provided.

Mixing up CIS and VAT

CIS and VAT are separate obligations, but they interact — particularly under the VAT domestic reverse charge for construction services. Confusing the two, or applying them both incorrectly on the same invoice, creates returns that do not reconcile and can flag your account for review.

Missing monthly returns

Contractors must file monthly CIS returns on time regardless of whether any payments were made. It sounds administrative, but the penalties accumulate quickly if returns are overlooked.

Gross payment status (GPS) is the end goal for most established subcontractors. It means the contractor pays the full invoice amount with no deduction, giving the subcontractor control over when and how they settle their tax — rather than having money withheld throughout the year.

To qualify, a subcontractor needs to pass three tests: a business test, a turnover test (broadly, net construction turnover of at least £30,000 per year for a sole trader, higher for companies), and a compliance test covering their tax filing and payment record. HMRC looks at the 12 months preceding the application, so a single missed return or late payment can result in a refusal.

GPS is not permanent. HMRC can withdraw it if a business’s compliance record deteriorates, and they do. We have seen clients lose gross payment status after a period of disorganised record-keeping, only to revert to 20% deductions while they rebuild their compliance history.

If GPS is something you are working towards, or if you are concerned yours might be at risk, it is worth reviewing your filing record well in advance of any HMRC review cycle — not scrambling to fix things once contact has been made. That is exactly the kind of proactive work we do with construction clients throughout the year, rather than waiting for problems to surface at year-end.