The Construction Industry Scheme (CIS) explained.

The Construction Industry Scheme requires contractors to deduct tax from payments to subcontractors and pay it to HMRC. The deduction is 20 per cent for registered subcontractors, 30 per cent for unregistered ones, and nil for those holding gross payment status. Returns are due monthly by the 19th, and the deduction applies to labour, not materials.

What is the CIS scheme, and who does it cover?

CIS is a withholding regime, not a separate tax. HMRC set it up because construction runs on short engagements and mobile labour, which historically produced a large unpaid tax population. The scheme moves collection to the point of payment: the contractor withholds, HMRC holds the money, and the subcontractor either reclaims the excess or has it set against a liability. HMRC's overview sits at What is the Construction Industry Scheme, and the full technical guide is CIS 340.

The scheme covers most construction operations on buildings and structures in the UK: site preparation, demolition, alterations, repairs, decorating, installing heating, lighting, power and water systems, and cleaning inside a building after construction work. It does not cover architecture and surveying, carpet fitting, delivering materials, making materials off site, or work on a site that is clearly not construction, such as running a canteen.

Who counts as a contractor and who counts as a subcontractor?

A contractor is anyone paying subcontractors for construction work. That obviously includes builders and developers, and it also catches deemed contractors: businesses outside construction whose spend on construction operations exceeds 3 million pounds in the previous 12 months. That test replaced the older averaging rule from 6 April 2021, so a retailer or a manufacturer that has been fitting out sites can find itself inside CIS without having thought of itself as a construction business.

A subcontractor is anyone paid to carry out construction work for a contractor. A business can be both at once, and most established trades are: taking a main contract, then paying its own trades underneath. Both registrations are separate, and both sets of obligations run at the same time. Your obligations are set out at what you must do as a CIS contractor and what you must do as a CIS subcontractor.

What are the CIS deduction rates in 2026?

The rate applies to the labour element only. Before deducting, strip out the direct cost of materials, consumable stores, plant hire, fuel other than for travelling, and manufacturing or prefabricating materials. Strip out VAT as well. The most expensive routine error in this scheme is deducting 20 per cent from a gross invoice that includes 40,000 pounds of materials, which overtaxes the subcontractor and leaves the contractor arguing about a payment it has already sent to HMRC.

Verification is not optional and it is not a formality. You verify each new subcontractor with HMRC before the first payment, and HMRC returns the rate to use plus a verification number. Paying at 20 per cent because the subcontractor said they were registered, without verifying, is the failure that most commonly produces a determination for underdeducted tax.

When are CIS returns and payments due?

CIS runs on tax months ending on the 5th. The monthly return covering the tax month is due by the 19th of the following month, filed even in a month with no payments unless you have told HMRC the scheme is inactive. Payment of the deductions follows the PAYE calendar: the 22nd if paid electronically, the 19th if paid by post. HMRC's filing page is file your monthly returns.

These stack per return, not per scheme. A contractor that stops filing for a year is looking at four separate penalty events on each of twelve returns, which is how a dormant scheme nobody remembered to close produces a five figure bill. Check the current penalty figures on the HMRC page before relying on them, and if a scheme is genuinely dormant, tell HMRC rather than leaving it open.

You also owe every subcontractor a payment and deduction statement within 14 days of the end of the tax month. Subcontractors need it to reclaim, and the absence of statements is the first thing that makes a reclaim slow.

How do subcontractors get CIS deductions back?

It depends on the trading structure, and this is the point where the two most common structures diverge sharply.

• Sole traders and partnerships. Deductions are credited against the income tax and Class 4 National Insurance on the Self-Assessment return, with any excess repaid after the return is filed. Deductions of 20 per cent on labour usually exceed the eventual liability, so most sole trader subcontractors are in an annual repayment position. Our Self-Assessment filing service handles the claim.
• Limited companies. Deductions are set against the company's PAYE, National Insurance, student loan and CIS liabilities each month by claiming them on the Employer Payment Summary. Any excess left at the end of the tax year is repaid or set against Corporation Tax. Companies that never file an EPS accumulate a credit they cannot use, and we see balances sitting unclaimed for two and three years.

The cash flow consequence is the reason construction businesses run out of money while profitable. A subcontractor invoicing 30,000 pounds of labour a month is 6,000 pounds a month lighter than the profit and loss account suggests. Our 13 week cash flow template is the tool we build first for anyone in that position, and our cloud bookkeeping service keeps the deduction ledger reconciled so the reclaim is not a year-end archaeology project.

What is gross payment status and how do you get it?

Gross payment status means contractors pay you in full and you settle your own tax through the normal cycle. It is worth real money in working capital, and it is also a commercial signal: main contractors read it as evidence of a compliant business. HMRC sets out the route at apply for gross payment status.

There are three tests. The business test asks whether you carry out construction work in the UK and run the business largely through a bank account. The turnover test looks at construction turnover excluding VAT and materials over the previous 12 months, with different thresholds for sole traders, partnerships and companies, and an alternative aggregate figure for larger businesses. The compliance test asks whether you have filed and paid everything on time in the previous 12 months, and since 6 April 2024 VAT compliance forms part of it, with HMRC able to remove gross status for VAT failures.

Status is reviewed annually and it can be withdrawn. A single late Corporation Tax payment can cost it, and losing it mid-year converts every future invoice into an 80 per cent payment overnight. If you hold gross status, treat filing deadlines as a covenant rather than an admin task.

How does the VAT domestic reverse charge interact with CIS?

Since 1 March 2021 the VAT domestic reverse charge for building and construction services applies to most CIS-reportable supplies between VAT-registered businesses. The supplier does not charge VAT. The customer accounts for both the output and the input VAT on its own return, and the invoice must say so.

It stops at the end user. Where the customer is the end user, or an intermediary supplier connected to one, normal VAT applies and the customer should confirm its status in writing. Getting this wrong in either direction is expensive: charge VAT that should have been reverse charged and the customer cannot reclaim it, or reverse charge to an end user and you have underdeclared output tax.

The second effect is on cash. Subcontractors who previously held customers' VAT for up to three months lost that float in 2021, and many moved to monthly VAT returns to sit in repayment more often. That is usually the right call, and it pairs with our VAT and tax compliance service. Contractors on the other side should read HMRC's VAT Construction manual before assuming a project is zero rated.

What changed in CIS recently?

Two changes matter for 2026 planning. From 6 April 2024, VAT obligations were added to the gross payment status compliance test, which widened the ways a business can lose that status. From the same date, most payments made by landlords to tenants for construction work were taken out of CIS scope, which removed a genuine trap for property businesses that were funding tenant fit-outs and had no idea they were contractors. Both changes are reflected in CIS 340.

The status question underneath all of this has not gone away. CIS decides how a payment is taxed, not whether the person is self-employed. A labour-only operative working set hours under close supervision may be an employee, in which case PAYE applies and CIS never enters the picture. Where the work is supplied through the operative's own limited company, the off-payroll rules apply instead, which we cover in the IR35 guide for contractors. Getting employment status wrong is a far larger exposure than getting a CIS rate wrong.

One opinion, from cleaning up other people's schemes: almost every serious CIS problem we inherit started as a materials split nobody documented. The subcontractor invoiced a round number, the contractor guessed the labour element, and two years later HMRC asked for the evidence. Put the split on the invoice, every time. Our construction accountants page sets out how we run the scheme end to end, and the UK accounting service page covers the rest of the compliance calendar. Unfamiliar terms are defined in our accounting and tax glossary.