How Does CIS Work

Learn how the Construction Industry Scheme (CIS) works, who it applies to and how tax deductions are managed for contractors and subcontractors.

If you work in the UK construction industry as a contractor or subcontractor, you’ve likely come across the Construction Industry Scheme, commonly known as CIS. Managed by HMRC, the scheme is designed to ensure that tax is correctly collected from self-employed construction workers. While it may seem complex at first, understanding how CIS works can help you stay compliant, avoid penalties, and keep more control over your finances.

In this guide, we’ll explain how CIS works, who it applies to, how deductions are made, and what your responsibilities are under the scheme.

What Is the Construction Industry Scheme?

The Construction Industry Scheme is a tax scheme introduced by HMRC to tackle underpayment of tax within the construction sector. It applies to payments made by contractors to subcontractors for construction work in the UK.

Under CIS, contractors deduct money from a subcontractor’s payments and pass it on to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance contributions.

The scheme is compulsory for most contractors and optional (but highly recommended) for subcontractors, as it affects how much tax they have deducted from their pay.

Who Needs to Register for CIS?

CIS applies to two main types of people and businesses:

1. Contractors

A contractor is any business or individual that pays subcontractors for construction work. This includes traditional construction firms, property developers, and even businesses not directly in construction if they spend more than £3 million on construction in any 12-month period.

Contractors must register for CIS and are legally required to deduct tax from subcontractors' payments.

2. Subcontractors

Subcontractors are self-employed individuals, partnerships, or companies that carry out construction work for contractors. If you are a subcontractor, you can choose whether to register. However, if you don’t, contractors will deduct 30 per cent from your pay instead of 20 per cent.

How Are CIS Deductions Calculated?

When a contractor pays a subcontractor, they must first verify the subcontractor’s CIS status with HMRC. Based on this verification, the contractor will deduct one of the following:

  • 20 per cent for registered subcontractors

  • 30 per cent for unregistered subcontractors

  • 0 per cent if the subcontractor has gross payment status

The contractor must then:

  • Pay the deduction to HMRC

  • Submit a monthly CIS return

  • Provide a deduction statement to the subcontractor showing the gross amount, deduction rate, and net payment

The subcontractor can later offset these deductions against their tax liability or claim a refund.

What Types of Work Are Covered?

CIS covers most construction activities including:

  • Site preparation

  • Demolition and dismantling

  • Building work

  • Alterations and repairs

  • Decorating and painting

  • Civil engineering work (such as road and bridge building)

Some services are not covered under CIS, such as architecture, surveying, and carpet fitting. If your business mixes construction and non-construction work, it’s important to understand which elements fall under CIS.

How Do Contractors Fulfil Their CIS Duties?

Contractors must meet the following obligations under CIS:

  1. Register with HMRC as a contractor

  2. Verify subcontractors’ CIS status before paying them

  3. Deduct tax from payments at the appropriate rate

  4. Submit monthly CIS returns detailing all payments and deductions

  5. Pay HMRC the deducted amounts by the 22nd of each month (or 19th if paying by post)

  6. Issue monthly deduction statements to each subcontractor

Failure to meet these obligations can result in financial penalties, interest charges, and reputational damage.

How Do Subcontractors Handle CIS?

If you are a subcontractor:

  • You should register with HMRC as a subcontractor under CIS to qualify for the 20 per cent rate

  • You will still need to submit a Self Assessment tax return each year

  • The tax already deducted under CIS is offset against your final tax bill

  • If too much tax has been deducted, you can claim a refund

  • If you have gross payment status, you receive full payments without deductions and pay tax later via Self Assessment or Corporation Tax

It’s important to keep accurate records of all payments and deduction statements received throughout the year.

What Is Gross Payment Status?

Gross payment status allows subcontractors to be paid in full with no tax deductions at source. To apply for gross payment status, you must:

  • Be based in the UK

  • Have a clean record of tax compliance (no late payments or returns)

  • Meet the turnover threshold (usually £30,000 for sole traders or £100,000 for companies with multiple directors)

  • Operate a business bank account

HMRC will review your application and continue to monitor your compliance. If you fall behind with payments or returns, gross payment status may be withdrawn.

What Records Should You Keep?

Both contractors and subcontractors must keep good records, including:

  • Invoices

  • Payment and deduction statements

  • Copies of CIS returns

  • Verification results

  • Bank statements

  • Contracts and agreements

HMRC may request these records during an enquiry or compliance check. Keep them for at least three years after the end of the tax year.

What Happens at the End of the Tax Year?

For Sole Trader Subcontractors:

CIS deductions are entered into your Self Assessment tax return. HMRC compares the tax already deducted to your actual tax bill. If you’ve overpaid, you’ll receive a refund. If you’ve underpaid, you’ll need to make up the difference.

For Limited Companies:

You claim CIS deductions through your company’s Employer Payment Summary (EPS) and offset them against your PAYE and National Insurance bill. If the deductions exceed your liabilities, you can request a repayment from HMRC.

Final Thoughts

The Construction Industry Scheme plays a key role in how tax is managed across the UK construction sector. Contractors are responsible for deducting tax and submitting returns, while subcontractors must ensure they’re registered and keeping proper records to avoid overpayments or penalties.

Whether you are new to CIS or have been operating for years, understanding how the scheme works helps you stay compliant and manage your business finances more effectively. If you are unsure about your obligations, a qualified accountant or tax adviser can provide guidance tailored to your situation.