CIS is not a tax. It is a withholding system — contractors take money off subcontractors’ payments and hand it to HMRC as an advance payment towards the subcontractor’s tax and National Insurance bill.
Nothing extra is being charged. The money is being collected earlier and from someone else. Understanding that one point resolves most of the confusion around the scheme.
How the money actually moves
- A contractor agrees to pay a subcontractor £10,000 for labour.
- The contractor verifies the subcontractor with HMRC and is told what rate to use.
- At 20%, the contractor pays the subcontractor £8,000 and sends £2,000 to HMRC.
- The contractor gives the subcontractor a payment and deduction statement.
- At the end of the year the subcontractor sets that £2,000 against their own tax bill.
The subcontractor has not paid more tax. They have paid it sooner, through someone else’s bank account. If their actual liability turns out to be less than £2,000, the difference comes back as a refund.
Contractor, subcontractor — or both
You must register as a contractor if either:
- you pay subcontractors for construction work
- your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment
You should register as a subcontractor if you do construction work for a contractor — as a sole trader, the owner of a limited company, or a partner in a partnership or trust.
You must register as both if you fall under both categories. This is extremely common. A jobbing builder who takes work from a main contractor and also sub-lets the electrical work is a subcontractor on one contract and a contractor on the other, on the same site, in the same week. Both registrations are needed, and both sets of obligations run in parallel.
Subcontractor registration is not compulsory. Contractor registration is.
Mainstream and deemed contractors
| Type | Who it covers |
|---|---|
| Mainstream contractor | A business whose trade is construction and which pays subcontractors — builders, labour agencies, gangmasters, property developers |
| Deemed contractor | A business that does not do construction work but has spent more than £3 million on construction in the 12 months since its first payment — housing associations and ALMOs, local authorities, government departments |
If you are heading towards deemed contractor status you have to monitor your construction spend. Nobody tells you when you cross the line.
What work is covered
CIS covers most construction work to a permanent or temporary building or structure, and civil engineering work such as roads and bridges.
| Covered by CIS | Not covered by CIS |
|---|---|
| Preparing the site — laying foundations, access works | Architecture and surveying |
| Demolition and dismantling | Scaffolding hire with no labour |
| Building work | Carpet fitting |
| Alterations, repairs and decorating | Making materials used in construction, including plant and machinery |
| Installing systems for heating, lighting, power, water and ventilation | Delivering materials |
| Cleaning the inside of buildings after construction work | Work on site that is clearly not construction — running a canteen or site facilities |
The distinction that catches people is scaffolding. GOV.UK lists scaffolding hire with no labour as outside the scheme. Supplying the labour to erect scaffolding is generally treated as construction work and inside it — but GOV.UK states only the exclusion, and the positive rule sits in HMRC’s CIS 340 guidance rather than on the consumer pages. On a contract that mixes hire with erection labour, confirm the treatment before deciding not to deduct.
The exceptions worth knowing
CIS does not apply where the work is:
- paid for by a charity or trust
- paid for by the governing body or head teacher of a maintained school on behalf of the local education authority
- on the subcontractor’s own property and worth less than £1,000 excluding materials — you must call the CIS helpline to get an exemption
For a deemed contractor, CIS also does not apply to payments for work on property that is not for sale or rent and is for their own business use, or to a construction contract worth less than £1,000 excluding materials. Again, the helpline has to grant the exemption; it is not automatic.
The same rules apply to businesses based outside the UK doing construction work here.
The three deduction rates
| Rate | Applies to |
|---|---|
| 0% | Subcontractors with gross payment status |
| 20% | Registered subcontractors (“net payment status”, also called payment under deduction) |
| 30% | Unregistered subcontractors |
HMRC tells the contractor which rate to use when the subcontractor is verified. The contractor does not choose.
What comes out before the deduction
The deduction is not applied to the whole invoice. Start with the gross amount and take off:
- VAT
- equipment which is now unusable — “consumable stores”
- fuel used, except for travelling
- equipment hired for the job — “plant hire”
- manufacturing or prefabricating materials
- materials, but only if the subcontractor paid for them directly
Then apply the CIS percentage to what is left. The deduction is on labour, not materials.
Contractors can ask for evidence such as receipts that the subcontractor paid for materials directly. Without evidence, the contractor estimates the cost of materials.
CIS is not a substitute for PAYE
This is the single most expensive misunderstanding in the scheme. On every monthly return the contractor has to declare that the subcontractors listed are not employees.
You could get a penalty of up to £3,000 for giving the wrong employment status for a subcontractor on your monthly return. Before taking someone on as a subcontractor, you must check whether you should be employing them instead. Paying a genuine employee through CIS to avoid employer National Insurance does not work and is expensive when unpicked.
What contractors have to do every month
Registering is the start of the obligation, not the end of it. A CIS contractor must:
- verify every new subcontractor with HMRC before paying them
- make the correct deduction and issue a payment and deduction statement within 14 days of the end of each tax month
- pay the deductions to HMRC by the 22nd of each month, or the 19th if paying by post
- file a monthly return by the 19th of every month following the last tax month
- keep full CIS records
- tell HMRC about changes to the business
If you know you will not pay any subcontractors for up to six months, you can ask HMRC to make your scheme ‘inactive’ and it will stop sending returns. Otherwise you file a nil return.
Frequently asked questions
What is the Construction Industry Scheme?
CIS is a withholding scheme. Contractors deduct money from a subcontractor’s payments and pass it to HMRC, where it counts as an advance payment towards the subcontractor’s tax and National Insurance bill. It is not an extra tax — it collects tax earlier and through a third party.
Do I have to register for CIS?
Contractors must register. You must register as a contractor if you pay subcontractors for construction work, or if your business does not do construction work but you have spent more than £3 million on construction in the 12 months since your first payment. Subcontractors do not have to register, but deductions are taken at 30% instead of 20% if they do not.
Can you be a contractor and a subcontractor at the same time?
Yes, and it is common. If you do construction work for a contractor and also pay your own subcontractors, you must register as both. Both sets of obligations apply at the same time.
What construction work is not covered by CIS?
Architecture and surveying, scaffolding hire with no labour, carpet fitting, making materials used in construction including plant and machinery, delivering materials, and work on a construction site that is clearly not construction such as running a canteen or site facilities.
Is CIS deducted from materials?
No. Before applying the CIS percentage you take off VAT, consumable stores, fuel used except for travelling, plant hire, manufacturing or prefabricating materials, and materials the subcontractor paid for directly. The deduction applies to what is left, which is essentially labour.
Getting CIS running properly
CIS sits on top of payroll rather than beside it. If you already have employees, HMRC converts your PAYE scheme into a combined PAYE/CIS scheme and you make one payment a month covering both.
SmartFiling runs RTI payroll from £15 per employee per month, including auto-enrolment, payslips, P60s and year-end returns. Fixed fee, entirely online, reviewed by an ICAEW Chartered Accountant.
