If you work on construction sites as a subcontractor, the Construction Industry Scheme (CIS) affects every payment you receive. Money gets taken off before it reaches your bank account. If you’re a main contractor paying other tradespeople, you’re responsible for making those deductions and reporting them to HMRC every month.
CIS trips up a lot of tradespeople — either because they don’t register and end up losing 30% of every payment, or because they don’t know they’re entitled to claim back overpaid tax at the end of the year. This guide explains how the scheme works in plain English, what you need to do, and how to avoid the common mistakes.
Key Takeaways
- CIS applies to construction work — if you’re paid by a contractor to do building, plumbing, electrical, roofing, or similar work, you’re likely covered
- Unregistered subcontractors lose 30% of their gross payment as a tax deduction — registering with HMRC brings this down to 20%
- Gross payment status means zero deductions, but you need to meet strict HMRC criteria to qualify
- Contractors must file monthly CIS returns by the 19th of each month, even if no payments were made
- You can reclaim overpaid CIS deductions via your Self Assessment tax return — many subcontractors overpay and don’t realise they’re owed money back
What Is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a tax system run by HMRC that applies to payments made between contractors and subcontractors in the UK construction industry. Under the scheme, contractors deduct tax directly from subcontractor payments and pass it to HMRC on their behalf.
The scheme exists to reduce tax evasion in the construction sector. Before CIS, the industry had high rates of cash-in-hand work and undeclared income. The scheme forces tax to be collected at source rather than relying on individuals to declare it later.
CIS was introduced in 1971 and significantly reformed in 2007. It’s governed by the Finance Act 2004, with detailed rules set out in HMRC’s CIS guidance at gov.uk/what-is-the-construction-industry-scheme.
Who Does CIS Apply To?
CIS applies to two parties: contractors and subcontractors.
| Role | Definition | Key Obligation |
|---|---|---|
| Contractor | A business that pays others to do construction work | Must deduct CIS from subcontractor payments and file monthly returns |
| Subcontractor | A tradesperson paid by a contractor for construction work | Must register with HMRC to reduce their deduction rate |
Who counts as a contractor under CIS:
- Building companies, main contractors, property developers
- Businesses in other industries (not construction) whose annual spend on construction exceeds £3 million — this catches companies like supermarket chains doing regular building work
Who counts as a subcontractor under CIS:
- Any sole trader, partnership, or limited company paid by a contractor for construction work
- Labour-only subcontractors and plant hire workers included
What counts as construction work:
- Site preparation, groundwork, foundation laying
- Building, alterations, repairs, and maintenance
- Installing heating, lighting, and power systems
- Painting and decorating
- Roofing, cladding, and waterproofing
- Demolition
What is NOT covered by CIS:
- Supplying materials only (no labour)
- Purely professional services: architects, surveyors, consultants
- Plant hire with no operator
- Carpet fitting and furniture installation in residential properties
- Working in the oil, gas, and mining industries
CIS Deduction Rates
This is the part that matters most for your day-to-day earnings.
| Registration Status | Deduction Rate | What It Means |
|---|---|---|
| Gross payment status | 0% | You receive full payment — HMRC trusts you to pay your own tax |
| Standard (registered) | 20% | 20% deducted from your labour element before payment |
| Unregistered | 30% | 30% deducted if HMRC can’t verify you’re registered |
The deduction only applies to the labour element of your invoice, not materials. If you invoice £1,000 labour plus £200 materials, CIS applies to the £1,000 only.
Example at standard (20%) rate:
- Labour: £1,000
- Materials: £200
- CIS deduction (20% of labour): £200
- You receive: £1,000 (£800 labour + £200 materials)
- The £200 goes to HMRC on your behalf
Gross payment status requires you to have a clean compliance record with HMRC, a business bank account, and meet a net turnover test (at least £30,000 net turnover per year as a sole trader, or £30,000 per director for a company). HMRC reviews gross payment status annually. It can be withdrawn if you miss tax returns or payments.
How to Register for CIS
As a subcontractor, registration is straightforward and free. Once registered, you’re on HMRC’s system and contractors can verify you before payment — which means you pay 20% rather than 30%.
How to register as a CIS subcontractor:
- Go to gov.uk/register-as-subcontractor-for-construction-industry-scheme
- Log in with your Government Gateway credentials (or create an account)
- Have your Unique Taxpayer Reference (UTR) ready — you’ll need this
- If you’re sole trading under a business name, have that name ready too
You must already be registered for Self Assessment before you can register for CIS. If you haven’t done that yet, register at gov.uk first.
As a contractor, the process is similar but you also need to register as an employer with HMRC (even if you don’t have employees), because you’ll be making deductions and paying them to HMRC monthly.
How CIS Payments Work in Practice
Once you’re registered as a subcontractor, the process for each payment looks like this:
- You invoice the contractor for your labour and materials separately (or state them clearly on the same invoice)
- The contractor verifies you with HMRC before making the first payment — they call or check online to confirm your status and deduction rate
- The contractor makes the deduction — 20% of your labour element is held back
- You receive the net amount — your invoice minus the CIS deduction
- The contractor pays HMRC your deduction along with their monthly CIS return
The contractor should give you a payment and deduction statement each time they pay you. Keep these — you’ll need them when you do your Self Assessment tax return to show how much tax has already been paid on your behalf.
Contractors: Monthly CIS Returns
If you’re a contractor, you must file a CIS return with HMRC every month. The deadline is the 19th of each month, covering payments made in the previous tax month (which runs from the 6th to the 5th).
What to include in each return:
- Details of all subcontractors you paid
- The gross amount paid (labour element only)
- The deductions made
- Whether each subcontractor is registered for gross, standard, or unregistered status
If you made no payments in a given month, you still need to file a nil return or tell HMRC in advance you won’t need to file.
Penalties for late or missing returns:
| Delay | Penalty |
|---|---|
| Up to 2 months late | £100 |
| 2–4 months late | £200 |
| 4–12 months late | £300 or 5% of CIS deductions (whichever is higher) |
| Over 12 months late | Up to £3,000 per return |
These add up fast if you miss multiple months. HMRC takes late CIS returns seriously — according to HMRC’s published compliance data, CIS-related penalties are one of the most common triggers for compliance investigations in the construction sector.
Reclaiming Overpaid CIS Tax
Here’s the part many subcontractors miss. The deductions made under CIS aren’t your final tax bill — they’re payments on account. At the end of the tax year, you do your Self Assessment and the CIS deductions count against what you actually owe.
If your CIS deductions were more than your actual tax liability, HMRC owes you a refund.
How to reclaim:
- Complete your Self Assessment tax return each year (deadline: 31 January)
- Enter all CIS deductions on the return — use the payment and deduction statements from your contractors
- If you’ve overpaid, HMRC will refund the difference
Many subcontractors end up overpaying because they don’t claim all their allowable expenses — materials, tools, mileage, PPE, insurance, accountancy fees. Every legitimate business expense reduces your taxable profit and increases your potential refund.
According to HMRC, subcontractors should claim deductions within 4 years of the end of the tax year they relate to. Claims beyond that window are time-barred.
Common CIS Mistakes
1. Working unregistered. This is the most expensive mistake — you lose 30% of every payment instead of 20%. Register once and stay registered.
2. Not keeping deduction statements. If you can’t show your CIS deductions at tax return time, proving what was paid on your behalf becomes difficult. Keep every statement your contractor gives you.
3. Contractors not verifying subcontractors. Contractors must verify a new subcontractor with HMRC before the first payment. Skipping this — even informally — means you might deduct at the wrong rate, which can create penalties.
4. Deducting from materials. CIS only applies to the labour element. Deducting from materials as well is incorrect and leaves you paying too much.
5. Missing the monthly return deadline. The 19th of each month is fixed. Late returns trigger automatic penalties that stack up quickly.
Frequently Asked Questions
Does CIS apply to sole traders? Yes, CIS applies to sole traders working as subcontractors on construction projects. You register individually using your UTR number. Once registered, contractors deduct 20% from your labour payments rather than 30%.
What if I work for multiple contractors? Each contractor you work for must verify you with HMRC separately. If you’re registered, all contractors will see your standard 20% deduction rate. Keep deduction statements from each contractor — you’ll need all of them for your Self Assessment.
Can I apply for gross payment status? Yes. To qualify, you need a clean compliance record with HMRC (no late tax returns or payments in the last 12 months), annual net construction turnover of at least £30,000, and a business bank account. Apply through your Government Gateway account. HMRC reviews status annually.
What happens if a contractor doesn’t give me a deduction statement? Contractors are legally required to give you a payment and deduction statement within 14 days of the end of each tax month. If they don’t, ask for it in writing. If they still refuse, you can report it to HMRC. Without the statement, proving your CIS deductions at year-end gets complicated.
I do both construction and non-construction work — does CIS apply? CIS only applies to payments for qualifying construction work. If a contractor pays you partly for construction and partly for other services (e.g., site clearance plus janitorial services), the CIS deduction only applies to the construction element. Invoice separately where possible to make this clear.
Building Your Trade Business
CIS is one part of running a professional trade business — keeping your tax affairs in order, registering correctly, and making sure you’re not losing money through avoidable deductions.
The other part is making sure work comes to you. A professional website that shows up when customers search for your trade in your area is one of the most effective ways to keep your diary full. Digital Tradies builds websites for UK tradespeople from £49/month — no upfront cost, live in 3 days.
If you want to keep your CIS records clean and your accounts tidy, pairing that with accounting software is worth it. See our guide to the best accounting software for tradespeople.
