The Construction Industry Scheme (CIS) – what you need to know

The Construction Industry Scheme typically covers:

• Permanent building 
• Temporary structure 
• Civil engineering work  e.g. building roads or bridges

That work includes: 

• site preparation 
• alterations 
• dismantling 
• construction 
• repairs 
• decorating 
• demolition 

The scheme facilitates CIS deductions by arranging for contractors to deduct tax directly from subcontractors’ payments. Contractors subsequently pay the tax to HMRC on the subcontractors’ behalf.  

This means CIS deductions are similar to a payment on account of income tax and National Insurance Contributions (NICs) ahead of sub-contractors filing their self-assessment tax returns and paying their income tax and NICs bills. 

Who must register for CIS? 

If you are a contractor in the construction industry, you must register for CIS before hiring your first subcontractor. Contractors can be sole traders, partnerships, or limited companies. 

• A contractor hires subcontractors for contract work. If your business is in construction and you pay subcontractors for construction work, you are a mainstream contractor. 
• If you do not run a construction business but have spent over £3 million on construction in a 12-month period, you are considered a deemed contractor. 

As a subcontractor, you do not need to register for CIS, but registering may benefit you as you may have CIS deductions taken at a lower rate.  

What are the steps a contractor must take for the CIS process? 

1. What is the Employment Status of the subcontractor?

Check if contracts create employment or self-employment. If you are a contractor, you are responsible for checking employment status and can use the CEST tool to help with this. If you use this tool, keep a record of the findings to support your decision. If the contract indicates employment, you must employ the person instead of subcontracting the work or you may receive a penalty. 

In a chain, it is important to consider all the roles. For example, if Alison is a contractor and hires Brendan for brickwork, Brendan is a subcontractor. If Brendan then asks Chris to do some carpentry, Chris is a subcontractor. Brendan becomes both a contractor and a subcontractor. 

2. how do I register with HMRC? 

Register as a contractor with HMRC before hiring a subcontractor. You can register as a contractor online. 

To register, you will need: 

• Your Unique Tax Reference (UTR) 
• Your National Insurance (NI) number (or the NI number of a company director)
• Business name 
• Contact information 

Once registered, you will receive an employer PAYE reference and accounts office reference to use when making payments. Your business tax account allows you to see all business tax in one place; you may need to add the CIS service. You can file CIS returns using your business tax account. 

3. How do I verify the subcontractors with HMRC? 

When you hire subcontractors, you must verify them with HMRC to ensure that you use the correct tax deduction rate. To verify a subcontractor, you will need: 

• Subcontractor’s name 
• Subcontractor’s UTR 
• Subcontractor’s NI number 
• Subcontractor’s company registration number (if trading as a company) 

Obtain this information as soon as possible to avoid the subcontractor paying a higher rate of CIS deduction than necessary. If a subcontractor changes their business name or structure, you must verify them again. HMRC will provide you with a verification reference number and confirm the deduction rate. Keep a record of this for your monthly CIS return. 

4. How do I pay subcontractors and make CIS deductions? 

The rates of deduction are: 

• No deduction (subcontractor has gross payment status) 
• 20% (standard rate for registered subcontractors) 
• 30% (higher rate for unregistered subcontractors) 

If you have worked with a subcontractor before and included them on a CIS return in the current or previous two tax years, you will not need to verify them again.  

HMRC will notify you of any changes to the deduction rate. If the change is from gross to 20%, you have 30 days’ notice. If the change is from 20% or 30% to gross, you should use this as soon as possible. 

When a subcontractor buys items that the contractor will reimburse, the deduction is based on the payment excluding those costs. 

Example

Chris (subcontractor) is not registered for VAT, and his deduction rate is 20%. Brendan (contractor) has agreed to repay materials. 

Labour	£600
Materials	£240
Total	£840
Less: VAT charged	£0
Less: Materials, fuel, plant hire	£240
Balance before deduction	£600
Deduction (20%)	£120
Net amount	£480

Chris received £720 (£240 for materials and the net amount of £480). The deduction of £120 is paid straight to HMRC by Brendan via his CIS payment scheme. 

5. Do I need to provide any paperwork to subcontractors? 

Contractors must give a payment and deduction statement by the 19th of each month to each subcontractor. Contractors can issue statements monthly or for each payment if more frequent. 

6. How do I send deductions and monthly CIS returns to HMRC?

CIS returns 

Contractors must send a CIS return to HMRC by the 19th of each month. You can send the return online using the CIS online service or via commercial software.  

For every subcontractor, a CIS return must include: 

• Name or trading name 
• Amount paid before deduction 
• Cost of materials paid for by subcontractors 
• Deduction made 

The CIS return includes two declarations to complete: 

• Subcontractors are self-employed 
• Verification of subcontractor has been made with HMRC where necessary. 

A penalty of up to £3,000 can be applied if you do not state the correct employment status for a subcontractor on the CIS return. 

If you miss the deadline, penalties will be applied, starting from: 

• £100 for being one day late 
• a further £200 when two months late 
• an additional £300 or 5% of the CIS deductions on the tax return at six and 12 months

For returns later than 12 months, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.  

If you did not make any payments to subcontractors in a given month, let HMRC know through CIS online, or if you cannot use CIS online, by phone or post. If you forgot to tell HMRC you made no payments that month and you receive a £100 penalty for late filing, let HMRC know and they will cancel the penalty.  

If you receive a penalty for another reason and you do not believe you should have received it, you have 30 days to appeal via HMRC online or by post.  

Paying deductions to HMRC 

Deductions from subcontractors must be paid to HMRC by: 

• 22nd of each month when paying electronically. 
• 19th of each month when paying by cheque through the post.

You should pay the correct amount even if you calculated the deduction wrong. If you have PAYE employees too you can include PAYE, NICs and CIS deductions in same payment. 

If you have not used any subcontractors for a while, you can let HMRC know by ticking the inactivity box under the declaration section of the CIS return. HMRC will stop asking for monthly CIS returns for six months. 

7. What CIS records do I need to keep? 

You must keep detailed records of information contained on CIS returns and how you reached the figures. These should be readily available if HMRC asks, and you should keep these for at least three years after the tax year they relate to. This includes: 

• Gross amount 
• Deductions 
• Cost of materials paid by the subcontractor 

HMRC can charge penalties if records are not adequate, or you destroy records too soon. 

If there are any of the following changes to your business, you must tell HMRC: 

• business address 
• business structure e.g. sole trader to limited company 
• death of the contractor 
• you take on the business of another contractor (within 90 days) 
• you stop or restart using subcontractors 
• close your business 

How can TaxAssist Accountants help?  

CIS deductions and rules are complex and can feel daunting. TaxAssist Accountants can help you navigate the rules for CIS contractors, ensure you meet your verification, filing and deduction obligations and provide you with peace of mind that you are compliant. Call us on 01444 620144 or use our online contact form.  

 

Last updated 13 Mar 2026 | First published 14 Oct 2024

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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