In short: Under CIS, contractors deduct money from subcontractors' payments and pass it to HMRC as advance tax. Deductions are 20% for registered subcontractors, 30% for unregistered ones, and 0% for those with gross payment status. Contractors file a monthly return by the 19th.
The Construction Industry Scheme (CIS) is an HMRC scheme for the building trade. It sets rules for how contractors pay subcontractors for construction work. If you run a building, roofing, plastering or similar business – as a company or a sole trader – you will probably deal with it.
Who does CIS apply to?
Contractors are businesses that pay subcontractors for construction work. They include:
- mainstream contractors – builders, labour agencies, gangmasters and property developers
- deemed contractors – businesses outside construction that spent more than £3 million on construction in the 12 months after their first payment for it
Subcontractors are businesses that carry out construction work for a contractor. A business can be both a contractor and a subcontractor.
What work is covered?
CIS covers most construction work on buildings, including site preparation, alterations, repairs, decorating and demolition.
It does not cover some jobs, for example:
- architecture and surveying
- scaffolding hire without labour
- carpet fitting
- delivering materials
- non-construction services on site, such as running a canteen
The deduction rates
Before paying a subcontractor, the contractor must verify them with HMRC. HMRC then confirms the rate:
- 20% – the subcontractor is registered for CIS
- 30% – the subcontractor is not registered
- 0% – the subcontractor has gross payment status
The deduction is taken from the labour part of the invoice. The contractor first takes off VAT and the cost of materials the subcontractor bought directly (as well as some other costs, such as plant hire and fuel used, except for travel).
What contractors must do
- Register as a contractor with HMRC before taking on subcontractors.
- Verify each new subcontractor with HMRC before the first payment.
- Make the correct deduction from each payment.
- Give each subcontractor a payment and deduction statement within 14 days of the end of each tax month.
- File a monthly CIS return so that it reaches HMRC by the 19th of the following month. The tax month runs from the 6th to the 5th.
- Pay the deductions to HMRC by the 22nd (or the 19th if paying by post).
- Keep CIS records.
Late returns bring penalties, starting at £100 and rising the later the return is. If you paid no subcontractors in a month, tell HMRC to avoid a penalty.
What subcontractors should do
- Register for CIS to have 20% deducted instead of 30%.
- Keep your statements. The deductions count towards your tax and National Insurance.
- Sole traders claim the deductions back through their Self Assessment return.
- Limited companies can usually set the deductions against the tax they owe HMRC through payroll, rather than waiting for the year end. Ask your accountant how this works for your company.
Gross payment status
With gross payment status, you are paid in full with no deductions, which helps cash flow. To qualify you must pass tests on:
- compliance – filing and paying your tax on time
- business – running a construction business through a UK bank account
- turnover – broadly, construction turnover (excluding VAT and materials) of at least £30,000 for a sole trader, or £30,000 per director or £100,000 in total for a company, over the last 12 months
HMRC reviews gross payment status regularly. Late filing or payment can lead to it being removed.
Employed or self-employed?
CIS is only for self-employed subcontractors. If someone works like an employee – set hours, supervised, using your tools – they may need to be on your payroll instead. Getting this wrong can lead to penalties. If you are not sure, use HMRC's employment status tool or speak to an accountant.
How Form My Company can help
Setting up a construction business? Our Fully Inclusive Package gives you company formation, PAYE registration and VAT registration in one order. For ongoing CIS returns and payroll, see our bookkeeping, VAT and payroll service (price on request). An accountant should advise on your own CIS position.
Frequently asked questions
Do I need to register for CIS as a subcontractor?
It is not compulsory, but if you do not register, contractors must deduct 30% instead of 20% from your payments.
When is the CIS monthly return due?
The return must reach HMRC by the 19th of the month after the tax month ends. Tax months run from the 6th to the 5th.
Are materials included in the CIS deduction?
No. The deduction is worked out after taking off VAT and materials the subcontractor paid for directly.
Can a limited company get CIS deductions back?
Yes. A company can usually use them to reduce the tax it pays HMRC through payroll. An accountant can set this up correctly.
What is gross payment status?
It lets a subcontractor be paid with no CIS deductions. You must pass HMRC's compliance, business and turnover tests.