What is CIS (Construction Industry Scheme)?
CIS, the Construction Industry Scheme, makes contractors deduct tax from payments to subcontractors and pay it to HMRC as an advance on the subcontractor's tax bill.
What CIS means
The Construction Industry Scheme is HMRC's way of collecting tax from people working in construction before the end of the tax year. When a contractor pays a subcontractor for construction work, the contractor deducts tax from the labour part of the invoice and sends it to HMRC every month. The subcontractor then gets credit for those deductions on their Self Assessment return or, for a limited company, against its PAYE bill.
There are three deduction rates:
- 20% for subcontractors registered with HMRC for CIS
- 30% for subcontractors who are not registered
- 0% for subcontractors with gross payment status, who are paid in full and handle their own tax
Deductions apply to labour only. Materials the subcontractor bought for the job, and VAT, are left out of the calculation.
Example
A plasterer registered for CIS invoices a builder £2,400 for a job: £1,900 labour and £500 materials. The builder deducts 20% of the labour, which is £380, and pays the plasterer £2,020. The builder reports the £380 on its monthly CIS return by the 19th of the following month and pays it to HMRC. At the end of the year, the plasterer's Self Assessment shows the £380 as tax already paid. If their total bill comes to £3,000 and they have had £4,200 deducted across the year, HMRC owes them £1,200.
Why it matters for your business
If you are a contractor, you must verify each subcontractor with HMRC before paying them, file a return every month (a nil return if you paid no one, unless you tell HMRC you are inactive) and give subcontractors a monthly deduction statement. Penalties for late returns start at £100 and build quickly.
If you are a subcontractor, registering matters: unregistered workers lose 30% rather than 20% of their labour income until the return is filed. Keeping the monthly statements is essential, because they are your evidence for the refund. Sole traders often overpay through CIS and are due money back, which is a good reason to file early.
CIS and the VAT reverse charge
Since March 2021, most VAT-registered subcontractors supplying construction services to other VAT-registered contractors use the domestic reverse charge. The subcontractor does not charge VAT on the invoice; the contractor accounts for it instead. This sits alongside CIS rather than replacing it, so invoices need to show both correctly.
Cloudkeepers runs monthly CIS returns and reclaims for contractors and subcontractors if you would rather not.
Common questions
Yes. Sole traders and partners claim them on the Self Assessment return, and any excess is refunded. Limited companies set CIS suffered against their monthly PAYE liability and can claim any balance from HMRC after the tax year ends. Keep every monthly deduction statement as evidence.
You apply to HMRC and must pass three tests: a business test (UK bank account, construction work in the UK), a turnover test based on your construction labour income, and a compliance test showing your tax returns and payments have been on time. Lose the compliance record and HMRC can withdraw it.
No. The deduction is only on the labour element. The cost of materials the subcontractor bought for the job is excluded, as is VAT and any plant hire. That is why invoices should split labour and materials clearly.