If you work in the construction industry, there’s a good chance you’ve heard of the Construction Industry Scheme (CIS). Whether you’re a contractor, a subcontractor, or both, understanding how CIS works is essential for staying compliant and avoiding unexpected tax bills.
Below is a straightforward overview of what CIS is, who it applies to, and how to stay on top of your obligations.
What Is the Construction Industry Scheme?
The Construction Industry Scheme is a set of HMRC rules regulating how contractors pay subcontractors for construction work. Under CIS, contractors must deduct a percentage from subcontractors’ payments and pass it on to HMRC. These deductions act as advance payments towards the subcontractor’s tax and National Insurance.
Who Does CIS Apply To?
CIS applies to:
Contractors
Businesses or individuals who pay subcontractors for construction work. This includes property developers and some businesses whose main trade isn’t construction but who spend significant amounts on building work (known as “deemed contractors”).
Subcontractors
Individuals, partnerships, or companies who are paid to carry out construction work for contractors.
Many businesses in the sector fall into both categories.
What Counts as Construction Work?
CIS covers most types of construction activity, including:
- Site preparation
- General building work
- Alterations and repairs
- Decorating
- Demolition
- Installation of systems (e.g. heating, lighting)
Some work is not covered (for example, architecture, surveying, or materials supplied without labour), so it’s important to check the individual situation.
CIS Registration and Deduction Rates
If you are a subcontractor:
You should register for CIS before starting work. Registered subcontractors are deducted at 20%, while those unregistered are deducted at 30%, which can significantly reduce cashflow.
If you are a contractor:
You must register with HMRC before taking on subcontractors.
What Contractors Must Do Under CIS
Contractors have several ongoing responsibilities:
1. Verify subcontractors
Before paying a subcontractor, contractors must confirm their status with HMRC to determine the correct deduction rate.
2. Make CIS deductions
Deductions (20% or 30% unless paid gross) must be taken from labour costs and paid to HMRC.
3. File monthly CIS returns
Every month, contractors must file a CIS return showing payments made and deductions taken. Even if no payments were made, a nil return may still be required.
4. Provide subcontractor statements
Subcontractors should receive monthly statements showing payments and deductions made. They use these records for their tax returns.
Gross Payment Status (GPS)
Some subcontractors can apply to be paid gross — meaning no deductions are taken.
To qualify, HMRC looks at:
- Your tax compliance history
- The business structure
- Turnover above certain thresholds
GPS can help cashflow, but compliance must be maintained to keep it.
How Subcontractors Claim Back CIS Deductions
CIS deductions are treated as tax already paid. How you claim depends on your business structure:
- Sole traders and partnerships: Claim through the annual Self Assessment tax return.
- Limited companies: Offset CIS deductions against PAYE liabilities or claim a refund from HMRC.
Keeping accurate records all year makes this process far smoother.
Why CIS Compliance Matters
CIS can be complex, and mistakes can lead to penalties, cashflow issues, or disputes between contractors and subcontractors.
Common pitfalls include:
- Wrong deduction rates
- Missing CIS returns
- Treating employees as subcontractors
- Poor record-keeping
- Misunderstanding which work is within CIS
Having professional support helps keep everything on track.
Need Help Navigating CIS?
Whether you’re a contractor needing support with monthly returns or a subcontractor wanting to make sure your deductions are correct, JB Accounts can help you stay compliant and avoid surprises. Get in touch today to find out more