The CIS Scheme Explained: A Plain-English Guide for Builders and Subcontractors

The Construction Industry Scheme — known as CIS — is one of the most misunderstood aspects of running a construction business in the UK. Many builders and tradespeople only encounter it when they are hit with an unexpected deduction on an invoice, or when they take on their first subcontractor and realise they have compliance obligations they did not know about. This guide explains how CIS works, what you need to do, and how to make sure you are not paying more tax than you should.

CIS is an HMRC scheme that governs how payments are made from contractors to subcontractors in the construction industry. Instead of paying subcontractors their full invoice amount, contractors are required to withhold a percentage of the labour element and pay it directly to HMRC on the subcontractor's behalf. This withheld amount counts as an advance payment toward the subcontractor's tax and National Insurance bill.

The scheme exists because construction work has historically had high levels of tax non-compliance — workers paid in cash with income going unreported. CIS brings tax collection upstream to the contractor, who is easier for HMRC to monitor than thousands of individual subcontractors.

CIS applies to businesses and individuals working in the UK construction industry. It covers a wide range of trades: building, civil engineering, demolition, roofing, electrical work, plumbing, decorating, landscaping that forms part of construction work, and many others. It does not cover professional services such as architecture, surveying, or project management.

The scheme divides everyone into two roles. A contractor is anyone who pays subcontractors for construction work — even businesses whose main trade is not construction (for example, a property developer or a large retailer who regularly commissions building work). A subcontractor is anyone paid by a contractor for construction work. The same person can be both simultaneously — a building firm that both hires subbies and is itself subcontracted to a main contractor.

The amount a contractor deducts from a subcontractor's payment depends on the subcontractor's registration status with HMRC.

• 20% deduction — the standard rate for subcontractors who are registered with HMRC under CIS
• 30% deduction — the higher rate applied to subcontractors who are not registered, or who cannot be verified by HMRC
• 0% deduction (gross payment status) — for subcontractors who qualify for gross payment, meaning they receive their full invoice amount with no CIS deduction

CIS deductions only apply to the labour element of an invoice. If you invoice a contractor for £5,000 of labour and £2,000 of materials, the deduction is calculated on the £5,000 only — not on the materials. This makes it essential to separate labour and materials clearly on every invoice you raise as a subcontractor.

Contractors must register with HMRC before taking on their first subcontractor. Subcontractors do not have to register, but if they do not, they will have 30% deducted rather than 20% — so registration is almost always worthwhile.

Registration is done through HMRC's online services or by calling the CIS Helpline (0300 200 3210). You will need a Unique Taxpayer Reference (UTR) and to be either self-employed or a limited company. Once registered as a subcontractor, contractors can verify you online and apply the 20% rate.

Before making any payment, a contractor must verify every new subcontractor with HMRC. They do this online, providing the subcontractor's name, UTR, and National Insurance number (for individuals) or company registration number (for limited companies). HMRC then tells the contractor which rate to apply — 0%, 20%, or 30%.

If a contractor fails to verify you and simply applies the 30% rate, this is their error but it is one that costs you money immediately — even if you can reclaim it later. Make sure any contractor you work for has verified you before your first payment.

Every month, contractors must file a CIS monthly return with HMRC — even if no subcontractors were paid that month (in which case a nil return is required). The return records every payment made to each subcontractor and the deduction withheld.

Contractors must also provide each subcontractor with a monthly payment and deduction statement — similar to a payslip — showing the gross amount, the materials element, the deductible amount, and the CIS deduction. Keep these statements carefully: they are your evidence of how much CIS has been deducted from your income.

If your business meets certain criteria, HMRC will grant you gross payment status — meaning contractors pay you in full with no CIS deduction. You then pay your tax and NI directly to HMRC through Self Assessment or corporation tax in the normal way.

To qualify, your business must: have been in construction for at least 12 months; have a good compliance record with HMRC (tax returns filed, tax paid on time); and have an annual turnover above a minimum threshold (£30,000 net of materials for sole traders; higher for partnerships and companies). HMRC reviews gross payment status periodically and can remove it if compliance slips.

Gross payment status is worth pursuing if you are regularly having 20% deducted and having to wait until the end of the tax year to reclaim the overpayment. Better cash flow alone makes the application worthwhile for most established subcontractors.

CIS deductions withheld by contractors are not a final tax payment — they are an advance toward your tax bill. At the end of the tax year, you complete a Self Assessment return (for sole traders and partnerships) or a corporation tax return (for limited companies). The total CIS deducted from your payments during the year is offset against your tax liability. If more has been deducted than you owe, HMRC will refund the difference.

This is why subcontractors often receive a tax refund at the end of the year — particularly those with high materials costs (which bring taxable profit down) or significant business expenses (tools, vehicle, accountancy fees, etc.) that reduce the tax due. The refund can be substantial if your actual tax bill is significantly lower than the CIS deductions made.

Many self-employed builders are surprised to discover they are owed a significant tax refund at year end. The key is making sure all legitimate expenses are claimed against income — every pound of deductible expense reduces the tax bill and increases the refund.

— HMRC Self Assessment guidance

If you operate through a limited company, CIS deductions made from your company's income can be offset against the company's PAYE liability — the income tax and NI you pay on behalf of your employees (including yourself as a director). If CIS deductions exceed the PAYE liability, the surplus is refunded to the company. This is handled separately from the company's corporation tax return.

• Not registering as a contractor when you first pay a subcontractor — the obligation applies from day one
• Applying CIS deductions to the materials element of invoices — deductions are labour only
• Failing to verify a subcontractor before the first payment — HMRC requires verification, not just asking the sub for their UTR
• Missing monthly return deadlines — automatic penalties apply regardless of how much (or how little) was deducted
• Not keeping subcontractor payment statements — these are your evidence for Self Assessment
• Assuming CIS is your only tax obligation — Self Assessment, VAT, and other obligations still apply separately

HMRC's CIS guidance is available at gov.uk and is more readable than most tax guidance. The CIS Helpline (0300 200 3210) handles registration and verification queries. For anything more complex — especially if you are both a contractor and a subcontractor, or if you are considering going limited — a qualified accountant who works with construction businesses will pay for themselves many times over in avoided penalties and reclaimed deductions.