The Construction Industry Scheme (CIS) sets out how contractors handle payments to subcontractors for construction work in the UK. This article explains how CIS works for the 2026 to 2027 tax year: who it applies to, the deduction rates, monthly returns, gross payment status, and how CIS connects to your payroll and Real Time Information submissions.
What is the Construction Industry Scheme?
CIS is a tax deduction scheme run by HMRC that applies to most construction work carried out in the UK. Under it, a contractor deducts money from a subcontractor's payments and passes it to HMRC, where it counts as advance payments towards the subcontractor's tax and National Insurance. The scheme exists because construction has historically had many self-employed workers, and CIS lets HMRC collect tax closer to the point the work is done. It applies to payments for construction operations made by contractors to subcontractors, and the rules are set out in HMRC's guide CIS 340. CIS is not a separate tax; it is a mechanism for collecting tax and National Insurance in advance.
Who does CIS apply to?
CIS applies to contractors and subcontractors. A contractor is a business that pays subcontractors for construction work; a subcontractor is a business that carries out construction work for a contractor. Many businesses are both at once, because they are paid for construction work by one party and pay others to help carry it out. The scheme covers sole traders, partnerships and limited companies, as well as some bodies that would not think of themselves as builders, such as government departments, local authorities and large businesses with significant construction spend. Contractors must register, verify subcontractors, make the correct deductions, file monthly returns and issue statements. Subcontractors should register so they suffer the standard rate rather than the higher rate.
What is a deemed contractor?
A deemed contractor is a business whose main activity is not construction but which spends heavily on it and is therefore brought within CIS. The trigger is an average construction spend of more than £3 million in the previous rolling 12-month period, measured from the date of the first payment. Once that threshold is crossed, the business must register as a contractor and operate CIS on its construction payments like a mainstream construction firm. Typical examples include large retailers, banks, manufacturers, property investment companies, housing associations and government departments. The £3 million figure excludes VAT and the cost of materials. A deemed contractor can later apply to deregister if its spend falls back below the threshold and it does not expect to exceed it again.
What work is covered, and what is excluded?
CIS covers most construction work on a permanent or temporary building or structure, and civil engineering such as roads and bridges. Covered operations include site preparation, demolition, building work, alterations, repairs and extensions, installing heating, lighting, power, water and ventilation, cleaning the inside of buildings after construction, and painting and decorating. Excluded activities include the professional work of architects, surveyors and certain consultants; the manufacture or delivery of materials, plant or machinery; carpet fitting; hire-only scaffolding where the firm does not erect or dismantle it; and clearly non-construction work such as running a site canteen. If a single contract mixes excluded work with covered construction work, the whole contract is generally within CIS, so exempt work usually needs a separate contract to keep its exclusion.
How do I register for CIS?
If you are a contractor you must register before you take on and pay your first subcontractor. You register with HMRC as a new employer for the scheme, which gives you the references you need, including an employer reference and an accounts office reference. Subcontractors are not legally required to register, but it is almost always in their interest: a registered, verified subcontractor suffers 20% deductions rather than the 30% rate that applies to unregistered subcontractors, and they register using their Unique Taxpayer Reference (UTR). Many businesses register as both because they pay and are paid for construction work. When registering as a subcontractor you can also apply for gross payment status if you meet the conditions, which allows you to be paid in full with no deduction.
How do I verify a subcontractor?
Before paying a new subcontractor, a contractor must verify them with HMRC to confirm whether they are registered and which deduction rate to use. You verify online through HMRC's CIS service or compatible payroll software, providing your own UTR, accounts office reference and employer reference, plus the subcontractor's details: their UTR and National Insurance number if a sole trader, or the company UTR and Companies House registration number if a company. HMRC responds with the correct rate (0%, 20% or 30%) and a verification reference number, which you should keep with your records. You do not need to verify a subcontractor you have already included on a CIS return in the current or previous two tax years.
What are the CIS deduction rates?
There are three rates, depending on the subcontractor's status. The standard rate is 20%, for subcontractors who are registered for CIS and successfully verified. The higher rate is 30%, where the subcontractor is not registered or cannot be matched during verification. The third rate is 0%, for subcontractors with gross payment status, who are paid in full with no deduction. The verification process tells the contractor which rate to apply. The deduction is only ever applied to the labour element of a payment, never to the whole invoice where materials and other excluded items are involved.
What is the deduction taken from?
CIS deductions apply only to the labour element, not the full invoice. Before working out the deduction, the contractor removes the cost of materials the subcontractor paid for, including consumable stores, fuel for plant, plant hire and the cost of manufacturing or prefabricating materials. VAT charged by the subcontractor is excluded, as are amounts for the Construction Industry Training Board levy. What remains is the figure the rate is applied to. For example, if a registered subcontractor invoices £1,000 for labour plus £400 of materials, the 20% deduction applies only to the £1,000 labour, giving a £200 deduction, and the subcontractor is paid £1,200. Materials must be a genuine cost and must not be inflated to reduce the deduction.
What is gross payment status?
Gross payment status allows a subcontractor to be paid in full, with no CIS deduction taken from any of their payments. The subcontractor then accounts for all of their tax and National Insurance through their normal tax return, or for a company through its corporation tax and PAYE arrangements. It is valuable for cash flow, because the business holds its own money during the year rather than having 20% deducted at source. To get it, a subcontractor must apply to HMRC and pass three qualifying tests: the business test (it carries out construction work or supplies labour for it in the UK and runs its business mainly through a bank account), the turnover test (net construction turnover of at least £30,000 for a sole trader, £30,000 for each partner or £100,000 for the partnership, and £30,000 for each director or £100,000 for the company), and the compliance test (tax affairs kept up to date, including Self Assessment, PAYE, National Insurance, CIS and, since 6 April 2024, VAT). HMRC reviews the status regularly and can remove it if the business stops meeting the tests.
What is a CIS monthly return and when is it due?
A contractor must send HMRC a CIS monthly return, often called the CIS300, showing the payments made to all subcontractors in the tax month and the deductions taken. A CIS tax month runs from the 6th of one month to the 5th of the next, and the return must reach HMRC by the 19th of the month in which that tax month ends. For example, the return covering payments from 6 May to 5 June must be filed by 19 June. The return includes a declaration that the employment status of each subcontractor has been considered and that the verification requirements have been met. Returns are filed online, and the 19th deadline applies even if that date falls on a weekend or bank holiday.
Do I still need to file a return if I made no payments?
If you are registered as a CIS contractor but did not pay any subcontractors in a tax month, you must still tell HMRC. You can submit a nil return for that month, which carries the same 19th deadline, or notify HMRC that you expect to make no further payments for a period so returns are not expected. A nil return filed late attracts the same penalties as any other late return, so a quiet month should never be ignored. If you stop using subcontractors permanently you can ask HMRC to make your scheme inactive, which removes the obligation to file.
What is a payment and deduction statement?
A payment and deduction statement is the document a contractor must give to each subcontractor they have made a deduction from, setting out what was paid and what was withheld. It must be provided within 14 days of the end of the tax month, meaning by the 19th of the following month. It must show the contractor's name and employer reference, the tax month, the subcontractor's UTR or verification number where the higher rate was applied, the gross amount paid, the cost of any materials taken into account, and the amount deducted. These statements are the subcontractor's evidence of tax already taken during the year, which they need to reclaim or offset the deductions. Subcontractors with gross payment status are not given statements because no deduction is made.
How does a limited company subcontractor reclaim CIS deductions suffered?
A limited company that has had CIS deductions taken from its income reclaims them through its payroll, not its corporation tax return. Each month the company reports the total CIS deductions suffered to HMRC on its Employer Payment Summary (EPS), submitted through Real Time Information by the 19th. HMRC then reduces the company's own PAYE and National Insurance bill for that month by the deductions suffered. If the deductions suffered exceed the PAYE and National Insurance due, the excess is carried forward to set against later months in the same tax year. If there is still an unrecovered balance at year-end, the company can ask HMRC to repay it or set it against other liabilities such as corporation tax. The same EPS is used to report recovered statutory payments and the Apprenticeship Levy, so a company that is both an employer and a CIS subcontractor reports everything on one submission. Trying to recover company CIS deductions through the corporation tax return instead can lead to a penalty, so the payroll route should always be used.
How does CIS interact with PAYE?
CIS and PAYE are separate systems. PAYE applies to employees, where the employer operates income tax and National Insurance on wages and reports them through the Full Payment Submission each payday. CIS applies to subcontractors, who are normally self-employed, and the contractor deducts a flat-rate amount on account of the subcontractor's eventual tax bill rather than calculating tax on a personal tax code. A worker should be on PAYE if they are genuinely an employee, and treating an employee as a CIS subcontractor to avoid employer obligations is a serious compliance risk, which is why CIS returns include an employment status declaration. The one place the two systems meet is the EPS, where a limited company offsets its CIS deductions suffered against its PAYE liabilities.
What are the penalties for filing a CIS return late?
HMRC charges automatic penalties when a CIS monthly return, including a nil return, is not filed by the 19th deadline. The penalties escalate: an initial £100 penalty applies as soon as the return is one day late; a further £200 penalty once it is two months late; and at six months and again at twelve months late, a further penalty of £300 or 5% of the deductions on the return, whichever is higher. For very late returns, HMRC can apply a higher final penalty of up to £3,000 or 100% of the CIS deductions, whichever is greater, particularly where information has been deliberately withheld. New contractors filing their first returns may benefit from a capped penalty in some circumstances, and you can appeal a penalty if you have a reasonable excuse. Filing on time, even with a nil return, is the only reliable way to avoid these charges.
What records do I need to keep, and how does the VAT reverse charge interact?
Both contractors and subcontractors must keep CIS records for at least three years after the end of the tax year they relate to. Contractors should keep the gross amount of each payment, the cost of any materials deducted, the amount deducted, and the verification reference number where the higher rate was applied; subcontractors should keep the payment and deduction statements they receive. If HMRC asks to see your records and you cannot produce them, you can face a penalty of up to £3,000. Separately, the VAT domestic reverse charge for building and construction services, in force since 1 March 2021, applies to many of the same supplies as CIS: where both parties are VAT-registered in the UK, the supply is reported within CIS, and the customer is not an end user, it is the customer rather than the supplier who accounts for the VAT. Because the rules overlap heavily, businesses that operate CIS usually need to consider the VAT reverse charge on the same contracts; check HMRC's domestic reverse charge guidance or take professional advice for a specific supply.