CIS Explained: Construction Industry Scheme Rates, Registration and Returns

If you work in construction, as a contractor paying subcontractors or as a subcontractor being paid, CIS affects your cash flow every single invoice. Here is exactly how it works, and how to avoid the mistakes that cost people money.

What is CIS?

The Construction Industry Scheme (CIS) is HMRC's system for collecting tax at source from payments made to subcontractors in the construction industry. Instead of a subcontractor receiving their full invoice and settling tax later, the contractor deducts an amount up front and pays it directly to HMRC. That deduction counts as an advance payment toward the subcontractor's eventual Income Tax and National Insurance bill.

Who counts as a contractor: any business paying subcontractors for construction work, plus any non-construction business spending over £3 million a year on construction over a rolling 12-month period (the "deemed contractor" rules).

Who counts as a subcontractor: anyone doing construction work for a contractor, whether a sole trader, partnership, or limited company.

Both contractors and subcontractors must register with HMRC for CIS. This is separate from your normal payroll or VAT registration. If you employ staff alongside subcontractors, our UK payroll guide covers PAYE and National Insurance for the employed side of your workforce.

Current CIS deduction rates

Three rates apply, depending on the subcontractor's status:

Status	Rate
Gross payment status	0% (no deduction)
Registered and verified	20%
Unregistered or unmatched	30%

The deduction applies to the labour portion of the invoice only. The reasonable cost of materials the subcontractor has genuinely supplied is excluded, though the subcontractor needs to be able to evidence that cost. If materials cannot be evidenced separately, HMRC may treat the whole payment as labour and apply the deduction to the full amount.

Verification: the step contractors cannot skip

Before making the first payment to a new subcontractor, and every time you engage someone new, contractors must verify that subcontractor with HMRC using their Unique Taxpayer Reference (UTR) and National Insurance number (or company details for a limited company). HMRC then confirms which rate applies. Once verified, that rate is locked in for the contract.

You cannot rely on what a subcontractor tells you about their own status. Deduct at the wrong rate and HMRC will chase the contractor, not the subcontractor, for the shortfall.

Gross payment status: getting paid in full

Subcontractors with gross payment status receive the full invoice amount with no deduction, then settle their tax liability directly through Self Assessment (or Corporation Tax and payroll offset, for limited companies).

To qualify, you generally need to pass three tests:

• Business test: you're genuinely running a construction business
• Turnover test: your annual construction turnover typically needs to be at least £30,000 (for a sole trader; different thresholds apply for partnerships and companies with multiple partners or directors)
• Compliance test: a clean tax record, with returns and payments made on time

You can apply for gross payment status at the same time as first registering as a CIS subcontractor, or later once you meet the conditions.

Important change: the conditions for gross payment status tightened from April 2024, and from April 2026 HMRC has stronger powers to remove gross payment status immediately where it believes a business knew, or should have known, it was part of a tax fraudulent supply chain. This makes maintaining a genuinely clean compliance record more important than ever, gross payment status is no longer something HMRC hesitates to revoke.

Filing and payment deadlines

CIS operates on tax months, which run from the 6th of one calendar month to the 5th of the next.

• Return deadline: the 19th of the month following the tax month the payments were made in
• Payment deadline: the same date, the 19th if paying by cheque, or the 22nd if paying electronically

These are two separate obligations. Filing the return on time does not mean the payment is automatically covered, and vice versa. HMRC's automatic penalty system starts the day after the deadline, with no reminder.

One detail that catches people out: HMRC does not extend these deadlines when they fall on a weekend or bank holiday for the filing deadline, the online system runs continuously. For electronic payment, if the 22nd falls on a weekend, cleared funds need to reach HMRC by the last working banking day before it.

Nil returns: if you had no subcontractor payments in a given tax month, you still need to file a nil return, or tell HMRC in advance that no return is expected for a period, otherwise a penalty can still apply.

How subcontractors reclaim CIS deductions

CIS deductions are not the final tax bill, they are advance payments credited against what you actually owe.

• Sole traders and partnerships: reclaim through Self Assessment. HMRC offsets total CIS deducted during the year against your Income Tax and National Insurance liability, refunding any excess.
• Limited companies: reclaim either through Corporation Tax, or by offsetting CIS suffered against your own PAYE liability using an Employer Payment Summary (EPS).

How Books & Returns helps

CIS is one of the areas where a small administrative slip, a missed verification, a late monthly return, a materials cost that cannot be evidenced, turns into a real cash flow problem or an unnecessary deduction. We handle CIS registration, subcontractor verification, monthly CIS300 returns, and gross payment status applications, so contractors and subcontractors both know exactly where they stand every month.

This guide is for general information only and does not constitute tax advice. CIS rules depend on your specific circumstances, always confirm your position with a qualified accountant or check current guidance at gov.uk before making decisions based on this content.