If you work in construction — whether as a main contractor or a subie — the question of what is CIS and how it affects your cash flow is one worth understanding properly. The Construction Industry Scheme is HMRC’s mechanism for collecting tax within the construction sector, and it places specific obligations on both contractors and subcontractors.

We work with a lot of trades and construction businesses at Edward Harris, and the most common thing we hear is: “I thought CIS was just something my accountant dealt with.” That’s partly true — but understanding the basics means you’re less likely to be caught out by a missed return, a wrong deduction rate, or an unexpected HMRC letter. So here’s our plain-English take on how the scheme works.

The Construction Industry Scheme exists because HMRC recognised that the construction industry — with its complex web of contractors, subcontractors, and labour-only arrangements — was a significant source of tax non-compliance. Rather than waiting for individuals to settle their tax bills at the end of the year, HMRC decided to collect tax at source.

In practice, this means: when a contractor pays a subcontractor for construction work, they don’t pay the full invoice amount. Instead, they deduct a percentage and send that directly to HMRC on the subcontractor’s behalf. Those deductions count as advance payments against the subcontractor’s tax and National Insurance liability — so they’re not lost, they’re just collected early.

Think of it a bit like PAYE, but for self-employed construction workers. The subcontractor still needs to file a Self Assessment tax return at the end of the year, and if their deductions exceed what they actually owe, they’ll receive a refund. If they owe more, they settle the difference. The scheme covers construction work on permanent and temporary structures, as well as civil engineering — and it applies across the whole of the UK, including offshore territorial waters up to the 12-mile limit.

The scheme draws a clear line between two roles, and it’s worth knowing which one applies to you — because the obligations are quite different.

Contractors

A contractor, under CIS, is any business that pays other businesses or individuals to carry out construction work. That might be a large building firm managing a development, or a sole trader plumber who occasionally brings in a mate to help on a job. Even businesses outside the construction sector can fall within the scheme — what HMRC calls a “deemed contractor” — if their spending on construction work exceeds £3 million within a rolling 12-month period. Contractors must register for CIS before making their first payment to a subcontractor, and they must submit monthly returns to HMRC reporting those payments.

Subcontractors

A subcontractor is any business carrying out construction work for a contractor. Subcontractors are not required to register for CIS — but if they don’t, deductions are taken at 30% rather than the standard 20%. Registered subcontractors with a good compliance record can also apply for gross payment status, meaning deductions aren’t taken at all. That’s a significant cash flow benefit if you can qualify for it. Private householders who hire tradespeople directly are not contractors under CIS — the scheme only applies to commercial arrangements.

This is where a lot of businesses come unstuck — because CIS doesn’t cover everything that happens on a building site, and the boundaries are less obvious than you might expect.

Work that falls within CIS includes most physical construction, alteration, repair, dismantling, and demolition of buildings and structures, as well as civil engineering work like roads, bridges, and drainage.

Work that falls outside CIS includes a longer list than many people realise:

• Architecture and surveying
• Scaffolding hire where no labour is involved
• Carpet fitting
• Manufacturing or delivering materials to site
• Work that is clearly not construction — such as furnishing or decorating the interior of a building purely for aesthetic purposes

The materials point catches people out regularly. A subcontractor who buys and supplies materials as part of a job should only have CIS deductions applied to the labour element — but only if they directly incur the cost of those materials themselves. Recent rule changes have tightened this up, clarifying that contractors cannot simply pass materials costs through without proper verification.

If you’re unsure whether a particular type of work falls inside or outside the scheme, it’s worth checking before assuming — the penalties for getting it wrong flow both ways.

CIS has been updated several times over the years, and the most recent set of changes — with updated HMRC guidance effective from April 2026 — is worth being aware of if you’re in construction.

The headline changes include:

• Greater supply chain accountability. HMRC has strengthened its ability to look further up and down the supply chain when CIS obligations haven’t been met. This matters for contractors who work with multiple tiers of subcontractors.
• Digital reporting requirements. The direction of travel is increasingly towards digital record-keeping and submission, which aligns with Making Tax Digital more broadly.
• Set-off amendment power. HMRC can now amend the CIS deduction amounts that subcontractors claim on their RTI Employer Payment Summary returns. This closes a gap that had been used to overclaim deductions.
• Tighter penalties for false information. If a business supplies inaccurate information when applying for gross payment status, the penalty regime has been expanded. This is a serious area — gross payment status is a privilege, not a right.

The practical implication of these changes is that HMRC is taking CIS compliance more seriously than ever, with better tools to detect discrepancies. If your CIS processes have been a little ad hoc, now is a reasonable time to tighten them up.

We’ve helped a number of construction businesses sort out their CIS position — sometimes reactively, after an HMRC letter, and sometimes proactively as part of getting their finances properly organised. The errors we encounter most frequently aren’t exotic ones. They’re the straightforward, avoidable kind.

• Not verifying subcontractors before paying them. Contractors are required to verify each subcontractor with HMRC before making the first payment. If you skip this step, you may apply the wrong deduction rate — and that becomes your problem to fix.
• Missing monthly return deadlines. CIS returns are due by the 19th of each month for the previous tax month. Miss the deadline and penalties start immediately, even if the return is only a few days late.
• Misclassifying work as inside or outside the scheme. As noted above, the boundaries aren’t always intuitive. Making assumptions can lead to under-deducting (a contractor problem) or over-deducting (a subcontractor problem, because it ties up cash and takes time to reclaim).
• Confusing CIS with employment status. Being paid under CIS doesn’t automatically mean someone is self-employed. If the working arrangement looks like employment, HMRC may challenge it regardless of how the paperwork is structured.

Cloud accounting software — tools like Xero, QuickBooks, or FreeAgent — can help you track CIS deductions accurately and keep your returns on time. But the software only works well if the underlying setup is correct from the start.