Construction Industry Scheme
HMRC scheme requiring contractors to deduct tax (20% for registered subcontractors, 30% for unregistered) from payments to subcontractors for construction work. Materials are excluded; only the labour element is subject to deduction. Subcontractors reconcile via Self Assessment, where most receive a refund because the CIS deduction is typically higher than their actual tax liability after allowances and expenses.
How it works
Contractors have specific ongoing obligations under CIS: before making a first payment to a new subcontractor, they must verify that subcontractor's status with HMRC to confirm the correct deduction rate, and they must then file a monthly CIS return by the 19th of each month detailing every payment and deduction made in the previous tax month. Late or missing monthly returns can trigger automatic penalties even where the underlying tax has been correctly deducted and paid over.
Construction operations are defined broadly by HMRC and cover most work on buildings, structures, and civil engineering projects — including site preparation, demolition, alterations, and repairs — but exclude some specific activities such as architecture, surveying, and scaffolding hire without labour. Getting this classification wrong is a common source of disputes, since a payment wrongly treated as outside CIS can leave a contractor liable for the tax that should have been deducted.
Subcontractors who consistently have more tax deducted at source than they actually owe can apply for Gross Payment Status, which removes the deduction entirely and lets them manage their own tax liability through Self Assessment instead — useful for larger, more established subcontracting businesses with strong cash flow needs. Whether registered, unregistered, or gross-paid, every subcontractor still needs to file an annual Self Assessment return to finalise their actual tax position for the year.
Example: CIS deduction on an invoice
A registered subcontractor invoices a contractor £1,000 for labour plus £200 for materials used on the job, a total of £1,200.
CIS is only deducted from the labour element: 20% of £1,000 is £200, so the contractor pays the subcontractor £1,000 (£1,200 minus the £200 deduction), and the £200 is paid over to HMRC on the subcontractor's behalf.
Frequently asked questions
Are materials included in the CIS deduction?
No. CIS deductions only apply to the labour element of a payment — materials genuinely purchased for the job by the subcontractor are excluded from the calculation.
What happens if a subcontractor is not registered for CIS?
The contractor must deduct tax at the higher unregistered rate of 30%, rather than the 20% rate that applies to subcontractors registered with HMRC.
How does a subcontractor get their CIS deductions back?
By filing an annual Self Assessment return — because CIS deductions are usually higher than the subcontractor's actual tax liability once allowances and expenses are applied, most receive a refund.
Related Terms
CIS
Acronym for Construction Industry Scheme — the HMRC regime under which contractors deduct tax from payments to construction subcontractors at 20% (registered) or 30% (unregistered), with the labour element only, and subbies reconcile via Self Assessment.
Gross Payment Status
HMRC status that allows a CIS subcontractor to be paid in full with no tax deduction.
Self Assessment
The system by which individuals report their own income, gains, and reliefs to HMRC each year through an online or paper tax return, rather than having tax collected automatically under PAYE.
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