Construction Industry Scheme (CIS): A Guide for Builders and Subcontractors

The Construction Industry Scheme is HMRC's system for taxing construction payments at source: a contractor deducts money from a subcontractor's payment and hands it to HMRC as an advance payment towards that subcontractor's tax and National Insurance. The subcontractor then sets those deductions off against their own tax bill. This guide is for builders and subcontractors who have to price, invoice and get paid under the scheme, so it covers the rates and the returns, and then what CIS does (and does not do) to the figure you put in a quote.

Who counts as a contractor and who counts as a subcontractor

A contractor is any business that pays others to carry out construction work. A subcontractor is any business paid to carry it out. Most small builders are both on the same job: a subcontractor to the main contractor above them, and a contractor to the bricklayer, electrician and plasterer below them. If that is you, you register twice, once in each role, and you run both sets of duties side by side.

There is also the deemed contractor. A business outside construction (a retailer, a landlord, a manufacturer) becomes a contractor for CIS purposes once its spend on construction operations goes over £3 million in the previous rolling 12 months, and it must then operate the scheme on its construction payments until its spend falls back below the threshold and it has no further construction contracts in hand.

Private householders are not contractors. A homeowner paying a builder direct for an extension makes no deduction at all, which is why plenty of domestic builders only ever meet CIS as a subcontractor, or when they start paying their own subbies.

Work covered and work excluded

The borderline cases are worth checking rather than guessing. HMRC's own list of what counts as construction operations sits in its CIS guidance for contractors and subcontractors, and getting it wrong changes what you may legally pay out.

The three deduction rates

• 20% for a subcontractor registered under the Construction Industry Scheme and successfully verified.
• 30% for a subcontractor who is not registered, or whom HMRC cannot match to its records.
• 0% for a subcontractor holding gross payment status.

Gross payment status is granted only after HMRC's three tests: a business test (a genuine UK construction business run through a business bank account), a turnover test of at least £30,000 of net construction turnover per sole trader, partner or director, with a £100,000 whole-firm alternative for partnerships and companies, and a compliance test covering the previous 12 months of filings and payments. Turnover for that test is labour only, excluding VAT and the cost of materials, so a materials-heavy subcontractor needs much higher billings to clear it. Since April 2024 VAT compliance forms part of the compliance test, and HMRC reviews the status regularly and can withdraw it.

How to register

As a subcontractor

1. Make sure you are registered as self employed (or that the company is registered for Corporation Tax) and that you have your UTR.
2. Register for CIS through HMRC's online service or by phone, giving your UTR, National Insurance number, and trading name.
3. A limited company registers with its company registration number and company UTR; a partnership registers the partnership and each partner separately.
4. Give every contractor you work for the exact details you registered with. A name or UTR that does not match is the usual reason a verification comes back at 30%.

Registering as a subcontractor is not compulsory. Not registering simply means 30% comes off your labour instead of 20%, so on £4,000 of labour you lose £1,200 rather than £800 and wait months for the difference.

As a contractor

1. Register as a new employer for CIS with HMRC before you make your first payment to a subcontractor.
2. Set up your Government Gateway access to the CIS online service, or use CIS-compliant payroll or accounting software.
3. Verify each subcontractor before paying them.
4. File monthly returns and issue payment and deduction statements from the first tax month in which you pay anybody.

Contractor registration is compulsory, and the duty starts at the first payment, not at the first return.

Verifying a subcontractor

Verification tells you which rate to apply, and it is the contractor who carries the risk of getting it wrong.

1. Collect the subcontractor's details: trading name, UTR, and National Insurance number for a sole trader, or company registration number and company UTR for a limited company.
2. Submit the verification through the CIS online service or your software before the first payment.
3. HMRC returns a verification number and the rate to apply: gross, 20% or 30%. The verification number is the same for everyone verified in that batch, except where a subcontractor cannot be matched, when it carries an extra suffix.
4. Record the number against that subcontractor and apply the rate HMRC gave you, not the rate the subcontractor says they are on.

You do not need to verify a subcontractor again if you have included them on a return in the current tax year or either of the two previous tax years. Taking someone on for three days and applying 20% because it is "usually 20%" is the classic error: if HMRC's records say 30%, the shortfall and the penalty land on the contractor.

How the deduction is worked out

The deduction is taken from the labour element only. Materials the subcontractor actually paid for come out first, VAT is never part of the calculation, and the rate is applied to what is left.

Worked example, one subcontractor invoice:

The £800 is not lost. It is paid over to HMRC in that subcontractor's name and credited against their tax bill.

What counts as materials

Materials means what the subcontractor genuinely paid for and is passing on, at cost. If the subcontractor is VAT registered, the VAT on those purchases is stripped out first, because they recover it. If they are not VAT registered, the VAT-inclusive cost is what they paid. Plant hired in from a third party, and the fuel for it, can be treated as materials; plant the subcontractor already owns cannot, and nor can their own travel or subsistence.

Padding the materials line to shrink the deduction is not a grey area. HMRC treats an inflated materials figure as an understatement by the contractor, who is then liable for the deduction that should have been made, plus interest and a penalty, even though the subcontractor wrote the invoice.

The monthly return and paying HMRC

A contractor files a CIS300 return for every tax month, which runs from the 6th of one month to the 5th of the next. The return lists every subcontractor paid, the gross amount, the materials taken out and the deduction made, and it carries a declaration that nobody on it is really an employee. The deadline is the 19th of the month following the tax month end.

Nil returns are required again: since 6 April 2026 a contractor who paid no subcontractors in a tax month must file a nil return or tell HMRC the business is inactive. Deductions are paid over by the 22nd if you pay electronically, or by the 19th if you still pay by post, with the same tax month you have just reported.

Late filing penalties, per return:

Penalties run per return, so three missed months are three separate charges. Persistent lateness also costs a subcontractor their gross payment status.

Payment and deduction statements

Within 14 days of the end of each tax month, a contractor must give every subcontractor they deducted from a written payment and deduction statement showing the contractor's name and employer reference, the subcontractor's UTR, the tax month covered, the gross amount, the materials excluded and the amount deducted. Gross payment subcontractors do not need one.

For the subcontractor these statements are the proof of tax already paid. Lose them and you are asking HMRC to accept deductions you cannot evidence, which is why the sensible habit is a folder per contractor and a running total each month.

Getting the deductions back

A sole trader or partnership puts the total CIS suffered on the Self Assessment return, where it is set against income tax and Class 4 National Insurance. Because 20% has been taken off turnover rather than profit, it very often produces a refund after expenses.

A limited company does not claim through Corporation Tax. It offsets CIS suffered against its own PAYE, National Insurance and CIS liabilities month by month, reporting the figures on the Employer Payment Summary. Any balance still unused at the end of the tax year is reclaimed from HMRC after the final EPS.

Exemptions and the cases where CIS does not apply

• Construction work carried out wholly outside the UK.
• Work a business does on its own property, where no payment passes between contractor and subcontractor.
• Payments by a private householder direct to the builder.
• Small contracts where HMRC has issued a deeming decision, which can cover a one-off contract of less than £1,000 excluding materials.
• Anyone who is genuinely an employee: they go through PAYE, not CIS, and paying a site worker under CIS when the working arrangements look like employment is one of the things HMRC checks hardest.

The VAT domestic reverse charge sits on top

Separate rules, same invoices. The VAT domestic reverse charge for building and construction services applies where the supply is reportable under CIS, both parties are VAT registered, and the customer is not an end user. The subcontractor charges no VAT and states on the invoice that the customer accounts for it; the contractor declares that VAT as output tax and recovers it as input tax on the same return. The CIS deduction is unchanged: still 20% or 30% of the labour element. In the worked example above, under the reverse charge the £1,200 VAT line simply disappears from the cash the contractor pays.

Pricing a job when CIS applies

The price you quote the client is the full value of labour and materials, before any deduction. The CIS deduction is tax withheld on account of the subcontractor's own bill, not a cost of building the job, so it never belongs in the quote as an uplift, a margin or a line item. Adding it on is double counting: you would be charging the client for tax you were always going to pay on the profit.

What CIS does create is a timing cost. A registered subcontractor receives 80% of their labour value when the money lands and the rest months later through their return, so the planning is cash flow planning: the working capital to carry wages and materials in between. A subcontractor losing 30% because they never registered has a real problem, and the fix is registering, not inflating the price.

Quote and value the work with labour and materials shown separately, in the quote and in every application for payment. That makes the deduction a two-line calculation for whoever pays you, keeps the materials figure defensible if HMRC asks, and stops a lump sum invoice turning into guesswork. It is the same discipline behind a proper estimate tasks breakdown, where labour and materials are split task by task, and it carries through to a detailed construction estimate when a client, lender or main contractor wants figures they can audit.

Contractor's record-keeping checklist

• Verification number and the rate HMRC gave for each subcontractor.
• Subcontractor details as registered: name, UTR, NI number or company number and company UTR.
• Gross amount paid, materials excluded and deduction made, for every payment.
• Copies of every payment and deduction statement issued, with the date sent.
• Every CIS300 filed and the date filed, nil returns included.
• Evidence behind the materials figures: invoices, not just the subcontractor's say-so.
• A documented view on employment status for anyone working the way an employee works.

Keep the lot for at least three years after the end of the tax year it relates to. HMRC can ask to see it, and the penalty for not producing it reaches £3,000.

FAQs

What work qualifies for CIS?

Most construction operations in the UK: site preparation, groundworks, demolition, building, alterations, repairs, installations of heating, power, water and ventilation, decorating, and cleaning inside after the work is done. Architecture, surveying, carpet fitting, hire of scaffolding without labour and delivery of materials fall outside it.

Do I need to register if I only ever work for householders?

No. A private householder is not a contractor and makes no deduction, so a builder working purely domestic and direct has nothing to register as a subcontractor for. The moment you pay a subcontractor yourself, you must register as a contractor.

What happens if I am both contractor and subcontractor?

You register in both roles and run both. You suffer deductions on your own labour from the contractor above you, and you verify, deduct and file returns for the subcontractors below you. A limited company sets the deductions it suffers against the PAYE and CIS it owes.

Is CIS deducted from materials?

No. Materials the subcontractor paid for come out at cost before the rate is applied, and VAT is never included in the calculation.

What if I am paid gross?

Gross payment status means 0% is deducted and you receive the full invoice, but you still have to be verified, you still appear on the contractor's monthly return, and you still pay the tax yourself through Self Assessment or Corporation Tax. Lose your compliance record and you lose the status.

Getting the Construction Industry Scheme right keeps subcontractors paid correctly and contractors clear of penalties, but it is only one part of pricing a job properly. If you want an estimate with labour and materials split the way CIS and your client both need them, Builder Expert's estimating service prices the job from your drawings, or you can price it yourself with our estimating software built around how UK construction jobs are actually costed.