CIS (Construction Industry Scheme)

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a UK tax system that requires contractors to deduct money from payments to subcontractors and pass it directly to HM Revenue and Customs (HMRC). These deductions count toward the subcontractor's tax and National Insurance contributions.

CIS applies to all construction work in the UK, including building, repairs, decorating, demolition, and civil engineering.

Who Must Register for CIS?

Contractors

You must register as a CIS contractor if you:

• Pay subcontractors for construction work
• Spend more than £3 million on construction in a 12-month period (even if not in the construction industry)

Subcontractors

Registration is voluntary but highly recommended. Without registration, contractors must deduct 30% from your payments instead of the standard 20%.

CIS Deduction Rates

How CIS Works

For Contractors

1. Verify subcontractors with HMRC before first payment
2. Calculate deductions on labour portion of invoices
3. Make deductions at the appropriate rate
4. Pay subcontractor the net amount
5. Submit monthly returns to HMRC by the 19th
6. Pay deductions to HMRC monthly

For Subcontractors

1. Register with HMRC to receive the 20% rate
2. Provide UTR number to contractors for verification
3. Invoice correctly separating labour and materials
4. Track deductions made from your payments
5. Reclaim overpayments through your tax return

What's Included in CIS

Construction Operations Covered

• Building and construction work
• Alterations, repairs, and decorating
• Installation of heating, lighting, power, and water systems
• Demolition and dismantling
• Site preparation and clearance
• Road building and civil engineering

What's Exempt

• Architecture, surveying, and professional services
• Carpet fitting (unless part of larger construction contract)
• Delivery of materials only
• Manufacturing materials away from site
• Work on your own property

Calculating CIS Deductions

CIS deductions apply to the labour portion of payments, not materials.

Example Calculation

Subcontractor Invoice:

• Labour: £2,000
• Materials: £800
• Total: £2,800

If registered (20% deduction):

• Deduction: £2,000 × 20% = £400
• Payment to subcontractor: £2,400

If unregistered (30% deduction):

• Deduction: £2,000 × 30% = £600
• Payment to subcontractor: £2,200

Gross Payment Status

Subcontractors can apply for gross payment status to receive payments without deductions. Requirements include:

• Business turnover of at least £30,000 (excluding VAT and materials)
• Up-to-date tax returns and payments
• Three years of trading history (or qualifying criteria for new businesses)
• Good compliance record with HMRC

Monthly Returns

Contractors must submit CIS returns to HMRC each month, including:

• All subcontractors paid during the month
• Gross amounts paid
• Deductions made
• Materials costs (not subject to deductions)

Deadlines

• Return due: 19th of each month (for previous tax month)
• Payment due: 22nd if paying electronically, 19th otherwise

Penalties for Late Returns

Common CIS Mistakes

Not verifying subcontractors: Always verify with HMRC before first payment—penalties apply for incorrect deductions.

Deducting from materials: Only labour costs are subject to CIS deductions, not materials.

Missing return deadlines: Late returns incur automatic penalties regardless of amount owed.

Not keeping records: Maintain records of all payments, deductions, and verification for at least 3 years.

Incorrect UTR numbers: Verify subcontractor details carefully—errors lead to 30% deductions.

Record Keeping Requirements

Contractors must keep records for at least 3 years, including:

• Details of all payments to subcontractors
• Verification reference numbers from HMRC
• Copies of all CIS vouchers/statements
• Monthly return copies
• Evidence of materials costs

CIS and VAT

CIS deductions and VAT are separate:

• VAT-registered subcontractors charge VAT on their invoices
• CIS deductions are calculated on the VAT-exclusive amount
• Both systems operate independently

Example with VAT

• Labour: £2,000
• VAT (20%): £400
• Total invoice: £2,400
• CIS deduction (on £2,000): £400
• Payment: £2,000 (labour - CIS + VAT)

Software and CIS

Modern contractor software can help manage CIS by:

• Calculating deductions automatically
• Generating compliant invoices and statements
• Tracking verification status
• Preparing monthly returns
• Maintaining required records

The Bottom Line

CIS is a fundamental part of doing business as a UK contractor. Whether you're a contractor making deductions or a subcontractor having them made, understanding CIS helps you stay compliant, avoid penalties, and manage cash flow effectively.

The key is maintaining good records, meeting deadlines, and ensuring all subcontractors are properly verified before payment.