The Construction Industry Scheme (CIS) requires contractors in the construction industry to deduct tax at source from payments made to subcontractors. The deducted amounts are passed to HMRC and count as advance payments toward the subcontractor’s tax and National Insurance bill.
Who Is Covered by CIS?
CIS applies to work that is classed as construction operations in the UK, including:
- Building, altering, repairing, or demolishing structures
- Installing heating, lighting, power, or water systems
- Painting, decorating, and site preparation
- Civil engineering work (roads, bridges, etc.)
It does not cover architecture, surveying, or the manufacture and delivery of materials (unless installation is included).
Contractors and Subcontractors
- Contractors: Businesses that pay subcontractors for construction work. This includes construction companies, property developers, and even non-construction businesses that spend more than £3 million on construction in a 12-month period.
- Subcontractors: Individuals or businesses that carry out construction work for a contractor.
Both must register with HMRC for CIS. Contractors must register before they take on their first subcontractor. Subcontractors should register to avoid higher deduction rates.
Deduction Rates
| Registration Status | Deduction Rate |
|---|---|
| Registered subcontractor | 20% |
| Unregistered subcontractor | 30% |
| Gross payment status | 0% |
Deductions are made from the labour element of a payment. The cost of materials that the subcontractor has purchased is not subject to CIS deductions, provided the subcontractor provides evidence of these costs.
Gross Payment Status
Subcontractors who meet certain conditions can apply for gross payment status, meaning contractors pay them without any deductions. To qualify, you must typically:
- Have a turnover above £30,000 per year (or £30,000 per partner in a partnership)
- Have passed all tax compliance tests — your tax returns and payments must be up to date
- Be carrying on a business in the construction industry
HMRC reviews gross payment status annually and can withdraw it if compliance lapses.
How Contractors Operate CIS
Contractors must:
- Verify each subcontractor with HMRC before making the first payment
- Deduct the appropriate percentage from payments
- Provide a CIS payment and deduction statement to the subcontractor
- Submit a monthly CIS return to HMRC by the 19th of each month
- Pay the deductions to HMRC by the 19th (or 22nd if paying electronically) of each month
How Subcontractors Reclaim Overpaid Tax
CIS deductions are advance payments against your final tax bill. At the end of the tax year:
- If you are self-employed, the deductions are offset against your Income Tax and NI bill on your Self Assessment return. If the deductions exceed your liability, you receive a refund.
- If you are a limited company, CIS deductions are offset against your PAYE, NI, and Corporation Tax liabilities.
Many subcontractors are owed significant refunds because the flat 20% deduction rate often exceeds their actual effective tax rate once expenses are accounted for.
Key Takeaway
If you work in construction as a subcontractor, always register for CIS to avoid the punitive 30% deduction rate. Keep meticulous records of materials costs and business expenses, and file your Self Assessment return promptly to reclaim any overpaid tax.