What Is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a UK tax scheme that affects how contractors pay subcontractors for construction work. Under CIS, contractors must deduct tax at source from certain payments made to subcontractors and pass this tax to HMRC.
If you work in construction as a contractor or subcontractor, understanding CIS is essential to:
- Avoid HMRC penalties
- Ensure the correct tax is deducted or reclaimed
- File an accurate Self-Assessment tax return
This guide explains how CIS works, who it applies to, deduction rates, reporting obligations, and how CIS affects your tax return.
Why Was the Construction Industry Scheme Introduced?
Before CIS, tax non-compliance in the construction industry was widespread. HMRC introduced CIS to:
- Reduce tax evasion
- Ensure subcontractors pay the correct Income Tax and National Insurance
- Improve transparency in construction payments
CIS shifts part of the tax collection responsibility onto contractors by requiring tax deductions before payment.
Key CIS Definitions (Explained Simply)
What Is a Contractor?
Under CIS, a contractor is not just a construction company.
A contractor includes:
- Any business carrying out construction work, or
- Any business that spends more than £1 million per year on construction operations, averaged over 3 years
This means banks, retailers, landlords, and supermarkets can be classed as contractors even if construction is not their main trade.
What Are Construction Operations?
Construction operations include:
- Building, altering, repairing, extending, demolishing or dismantling structures
- Permanent or temporary buildings
- Civil engineering works
Some activities are excluded, but most on-site construction work falls within CIS.
Who Is a Subcontractor?
A subcontractor is anyone who:
- Carries out construction work for a contractor, or
- Supplies labour (their own or others’) to carry out construction operations
Subcontractors can be:
- Sole traders
- Partnerships
- Limited companies
How Are CIS Payments Taxed?
Payments made by contractors to subcontractors are either:
- Paid gross (no tax deducted), or
- Paid net (tax deducted at source)
The deduction depends on the subcontractor’s CIS registration status.
CIS Deduction Rates
Subcontractor Status | Tax Deducted |
Registered (standard) | 20% |
Not registered | 30% |
Treated as employee | PAYE applies |
CIS deductions are not the final tax bill — they are advance payments towards your annual tax liability.
Gross Payment Status (No CIS Deductions)
Some subcontractors can be paid gross, meaning no tax is deducted at source.
Conditions for Gross Payment Registration
To qualify, HMRC requires all three tests to be met:
- Business Test
- The business operates in the UK
- Construction work is carried out
- Payments are mainly via a bank account (not cash-based)
- Turnover Test
- Construction turnover of at least £30,000 in the previous 12 months
- Compliance Test
- All tax returns submitted on time
- All PAYE, VAT, and Self-Assessment liabilities paid on time
- No serious compliance failures in the last 12 months
HMRC reviews gross payment status annually and can withdraw it if compliance slips.
CIS Verification – Contractor Obligations
Before paying a subcontractor, contractors must verify them with HMRC.
Using HMRC’s CIS online service, HMRC will confirm:
- Whether the subcontractor is registered
- Whether payment should be:
- Gross
- Net at 20%
- Net at 30%
Failing to verify can result in incorrect deductions and penalties.
Monthly CIS Returns (CIS300)
Contractors must:
- Submit a monthly CIS return (CIS300)
- Report:
- Payments made
- Tax deducted
- Materials costs
- File electronically only
Deadlines
- CIS return due: by the 19th of each month
- CIS tax payment due: by the 19th of each month
CIS deductions are paid alongside PAYE and NIC.
CIS Penalties for Late Filing or Payment
Late CIS returns trigger automatic penalties:
Delay | Penalty |
Late | £100 |
Over 2 months | £200 |
Over 6 months | £300 or 5% of deductions |
Over 12 months | Additional £300 or 5% |
These penalties are similar to Self-Assessment penalties and can escalate quickly.
How CIS Affects the Subcontractor’s Tax Return
If you’re a subcontractor:
- CIS deductions are treated as tax already paid
- You must still file a Self-Assessment tax return
- Overpaid tax can be refunded
- Underpaid tax must be settled by 31 January
Many subcontractors are owed tax refunds due to allowable expenses.
What Expenses Can CIS Subcontractors Claim?
As a self-employed subcontractor, you can deduct legitimate business expenses, including:
- Tools and equipment (e.g. drills, saws)
- Protective clothing (helmets, hi-vis, boots)
- Mileage (up to 45p per mile)
- Vehicle costs (van, fuel, insurance)
- Tool, public liability and vehicle insurance
- Travel costs (parking, trains, buses)
- Marketing and advertising
- Accounting fees (yes — including Taxd’s fee)
These expenses reduce your taxable profit and often result in CIS tax refunds.
Final Thoughts: CIS and Your Tax Return
The Construction Industry Scheme is complex — and mistakes can be expensive.
Whether you’re:
- A contractor filing CIS300 returns, or
- A subcontractor reclaiming CIS tax
