CIS Deductions: Complete Guide for Contractors and Subcontractors
Rates, verification, returns — everything you need to know
The Construction Industry Scheme (CIS) requires contractors to deduct money from subcontractor payments and pass it to HMRC as advance tax. Get the rates wrong or miss a monthly return and the penalties stack up fast.
Gross payment rate
0%
Available to verified subcontractors who meet HMRC criteria
Standard deduction
20%
Applies to verified subcontractors on HMRC's register
Higher deduction
30%
Applies to unverified or unregistered subcontractors
Monthly return deadline
19th of month
Following the tax month; £100/day penalty after 12 months
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a HMRC tax collection mechanism that requires contractors to withhold a percentage of payments made to subcontractors and send it directly to HMRC as an advance payment toward the subcontractor's income tax and National Insurance. It has operated in various forms since 1971.
CIS applies to construction operations in the UK, broadly following the same scope as the Domestic Reverse Charge — groundworks, structural work, fit-out, M&E, painting, roofing, and most trades. Professional services such as architecture, surveying, and site management are excluded.
The scheme benefits HMRC by reducing the tax gap in a sector with historically high levels of self-employment and cash payments. For subcontractors, deductions made under CIS are credited against their Self Assessment liability at year end — it is not an additional tax, but an advance payment.
Who Must Register Under CIS?
Registration requirements differ for contractors and subcontractors.
Contractors
Any business or individual that pays subcontractors for construction work must register as a CIS contractor with HMRC before making their first payment. This includes property developers, main contractors, and sub-contractors who further sub-contract.
Subcontractors
Any individual, partnership, or company that carries out construction work for a contractor should register. Unregistered subcontractors face a 30% deduction rate. Registered ones face 20%. Those with gross payment status face 0%.
Deemed contractors
Businesses outside construction that spend more than £3 million on construction in a 12-month period (or in a single contract) become 'deemed contractors' and must comply with CIS.
Excluded parties
Employees are not subcontractors. Companies with a contract of service (employment) rather than a contract for services (self-employment) fall outside CIS — though misclassification risk is high and IR35 should also be considered.
CIS Deduction Rates at a Glance
| Subcontractor Status | Deduction Rate | Condition |
|---|---|---|
| Gross payment status | 0% | Subcontractor verified; meets turnover/compliance tests |
| Registered & verified | 20% | Subcontractor is on HMRC's CIS register |
| Not verified / unregistered | 30% | Contractor could not verify subcontractor with HMRC |
| Materials element | 0% on materials | Genuine materials costs are excluded from CIS deductions — labour only |
| Travel and subsistence | Subject to deduction | Unless reimbursing actual receipted costs — grey area, seek advice |
HMRC Verification: How It Works
Before paying a new subcontractor, the contractor must verify them with HMRC. This is done online through the CIS Online Service (or by phone). You provide the subcontractor's UTR (Unique Taxpayer Reference), name, and company number (if applicable). HMRC returns either a verification number confirming status, or a 'not matched' response.
If HMRC cannot match the subcontractor, apply the 30% rate. Do not take the subcontractor's word for their registration status — HMRC will hold you responsible for the correct deduction regardless. Re-verification is not usually required for ongoing subcontractors unless there has been a gap in payments.
The verification number must be kept on file. It should appear on the monthly CIS return and on the deduction statement you provide to the subcontractor.
How to Process a CIS Payment: Step by Step
- 1
Receive the subcontractor's invoice
The invoice should split the charge into labour and materials. Only the labour element (and certain other amounts) are subject to CIS deduction.
- 2
Verify the subcontractor with HMRC
Log into HMRC CIS Online or use your accounting software. Enter UTR, name, and company number. Record the verification reference returned.
- 3
Calculate the deduction
Apply the correct rate (0%, 20%, or 30%) to the labour element only. Genuine materials are excluded. The deduction reduces the net payment to the subcontractor.
- 4
Pay the subcontractor
Pay the net amount (invoice minus deduction). Do not pay the full invoice amount and then try to recover the deduction later — this creates cash flow and compliance problems.
- 5
Issue a deduction statement
Give the subcontractor a written deduction statement showing gross payment, materials deducted, deduction rate, and net amount. This is mandatory and the subcontractor needs it to claim the deduction against their tax.
- 6
Submit the monthly CIS return
By the 19th of the following month, submit the CIS return to HMRC detailing all subcontractor payments. Pay any deductions held over at the same time (or combine with PAYE if applicable).
Materials: The Most Common CIS Mistake
CIS deductions apply only to the labour portion of a subcontractor's payment. Genuine materials that the subcontractor has purchased and will incorporate into the works are excluded from the deduction calculation. However, plant hire, equipment, and consumables are generally included. If a subcontractor inflates the materials element to reduce the deduction, both parties face HMRC scrutiny. Always ask for supplier receipts if the materials proportion seems high.
Gross Payment Status: Who Qualifies?
Gross payment status (0% deduction) is available to subcontractors who pass three tests:
Requirements
- Business test: the business must be run through a bank account and be a genuine business
- Turnover test: net CIS turnover of at least £30,000 per director / partner (or £100,000 overall for companies)
- Compliance test: all tax returns filed and taxes paid on time for the preceding 12 months
- Apply via HMRC CIS Online or call the CIS helpline — approval is not instant
Loss of Gross Status
- HMRC can cancel gross status if compliance record deteriorates
- Late filing of Self Assessment or corporation tax return triggers review
- Outstanding tax debt is a ground for cancellation
- HMRC reviews gross status holders periodically — keep your affairs spotless
CIS Penalties: What HMRC Can Charge
| Default / Failure | Penalty |
|---|---|
| Late monthly CIS return (up to 2 months) | £100 |
| Late monthly CIS return (2–6 months late) | £200 |
| Late monthly CIS return (6–12 months late) | £300 or 5% of deductions if higher |
| Late monthly CIS return (over 12 months) | Up to 100% of CIS deductions due — or £3,000 minimum |
| Failure to verify subcontractor (wrong rate applied) | Contractor liable for the shortfall plus interest |
| False deduction statements given to subcontractors | Up to £3,000 per statement |
| Failure to maintain records | Up to £3,000 |
CIS and the Domestic Reverse Charge
CIS and DRC are related but distinct. CIS is about income tax advance deductions on payments to subcontractors. DRC is about who accounts for VAT on those same supplies. A payment can be subject to both simultaneously. Both apply where the work falls within CIS scope and both parties are VAT-registered. Managing them together requires careful invoice coding in your accounting software.
Reclaiming CIS Deductions as a Subcontractor
If you are a sole trader or partnership, CIS deductions are offset against your Self Assessment tax bill at year end. If deductions exceed your tax liability, HMRC will issue a refund. Keep all deduction statements your contractors give you — they are your evidence for the credit.
If you operate through a limited company, CIS deductions are offset against PAYE/NIC liabilities and corporation tax. You can include CIS suffered on your Employer Payment Summary (EPS) to reduce your PAYE payments in-year. If CIS deductions exceed your PAYE liability, you can apply to HMRC for a repayment.
Ostoya specialises in CIS subcontractor accounting — we track your deduction statements, reconcile them with HMRC records, and ensure you claim every pound back efficiently.
CIS Deductions FAQs
What happens if I forget to submit a monthly CIS return?
HMRC will issue an automatic £100 penalty after the 19th of the relevant month. The penalties escalate to £200, then £300 (or 5% of deductions), and potentially up to 100% of deductions if over 12 months late. Submit a nil return if you had no CIS payments in the period — this prevents the penalty even if there's nothing to report.
Can I pay subcontractors gross before verifying them with HMRC?
No. You must verify before paying. If you pay gross without verification and the subcontractor turns out to be unregistered, HMRC will hold you liable for the missing deduction plus interest and potentially a penalty. The verification takes a few minutes online.
Does CIS apply to materials the subcontractor buys?
No — genuine materials incorporated into the works are excluded from CIS deductions. Only the labour element is subject to the deduction. However, if materials are disproportionately high compared to labour, HMRC may challenge the split. Both parties should retain receipts and invoices.
I'm a subcontractor. How do I reclaim CIS deductions?
If you're a sole trader, your CIS deductions offset your Self Assessment tax bill. If you pay less tax than the deductions, HMRC refunds the excess. As a limited company, you offset CIS against PAYE via the Employer Payment Summary, and claim a repayment if deductions exceed PAYE. In both cases, keep all deduction statements.
Does CIS apply to Scottish devolved taxes?
CIS is a UK-wide scheme and applies in Scotland. Income tax on self-employment income is devolved (Scottish rates and bands apply), so CIS deductions offset Scottish income tax liabilities. The CIS mechanics — rates, verification, returns — are the same.
What's the difference between CIS and IR35?
CIS and IR35 are different anti-avoidance rules. CIS is specific to the construction industry and governs advance income tax deductions. IR35 (off-payroll working rules) applies across all industries and determines whether a worker providing services through a limited company should be taxed as an employee. A construction worker using a personal service company could face both — CIS deductions and an IR35 assessment.
CIS compliance support
Stop worrying about CIS returns
We handle monthly CIS returns, subcontractor verification, deduction statements, and year-end reconciliation for contractors and subcontractors across the UK.