CIS for subcontractors and contractors: how it works

The Construction Industry Scheme (CIS) makes a contractor take tax off a subcontractor's labour and pay it to HMRC. The deduction is 20% if the subcontractor is registered, 30% if not, and 0% with gross payment status. Materials, VAT and plant hire are left out. Contractors file a return and pay HMRC by the 19th of each month.

Who has to register for CIS?

You register as a contractor if you pay subcontractors for construction work. You register as a subcontractor if you do construction work for a contractor. Plenty of small firms are both: a roofer who subs work from a builder and pays a labourer of his own registers as both.

A business that doesn't do construction itself becomes a contractor once it spends more than £3 million on construction in the 12 months since its first payment. A householder paying for work on their own home is not a contractor, so domestic jobs sit outside CIS.

The scheme covers most work on buildings and civil engineering: site preparation, demolition, building, alterations, repairs, decorating, and installing heating, lighting, power, water and ventilation systems. It doesn't cover architecture and surveying, scaffolding hire with no labour, carpet fitting, making or delivering materials, or site jobs that clearly aren't construction, such as running the canteen.

From 6 April 2026, payments to local authorities and certain public bodies acting as subcontractors are outside the scheme.

How much does a contractor deduct?

The rate depends on what HMRC tells you when you verify the subcontractor:

You work out the deduction from the labour part of the invoice only. Start with the gross amount, then take off what the subcontractor paid for VAT, materials, consumable stores, plant hire, manufactured or prefabricated materials and fuel (except fuel for travelling). Apply the rate to what's left. You can ask for receipts for materials; if there are none, you estimate.

Worked example

A groundworks subcontract invoice through CIS

A registered groundworks sub invoices a VAT-registered main contractor for drainage on a small commercial job. Both are in CIS, so the VAT reverse charge applies too.

Labour	£3,000
Materials the sub bought (pipe, gravel, fittings)receipts attached	£1,200
Invoice total before VAT	£4,200
VATreverse charge: contractor accounts for it	£0
CIS deduction20% × £3,000 labour	−£600
Paid to the subcontractor£4,200 − £600	£3,600
VAT the contractor accounts for to HMRC20% × £4,200, reclaimed on the same return	£840

If the same job were for a householder, there would be no CIS and no reverse charge: the sub would charge VAT (if registered) and be paid in full. See does the reverse charge apply to my invoice for the VAT side.

Calculator: CIS on an invoice

Labour on the invoiceExcluding VAT£

Materials on the invoiceNo CIS on materials£

CIS rate20 registered, 30 unregistered, 0 gross%

You receive–

Your numbers, not a promise. Change any figure to match your firm.

What does a contractor have to do each month?

Verify each new subcontractor before the first payment, deduct at the right rate, then report and pay. You don't need to verify a sub you included on a return in the current or previous two tax years.

Late returns cost money even when no tax is owed. HMRC charges £100 the day after the deadline, £200 at two months, then the greater of £300 or 5% of the deductions at six months and again at twelve. Getting a subcontractor's employment status wrong on the declaration can bring a penalty of up to £3,000.

If you work out the 20% deduction on your own subbies by hand, every month that's a calculation per sub, a statement per sub and a return, all by the 19th.

How do subcontractors get paid and claim deductions back?

Give each contractor the exact details you registered with, including your UTR. If they can't verify you, they deduct 30% instead of 20%. You should get a payment and deduction statement within 14 days of the end of each tax month; keep every one, because HMRC may ask for them when you claim.

How you get the money back depends on how you trade:

• Sole traders and partners. On your Self Assessment return, record your pay before deductions as income and the total deducted as CIS deductions. HMRC takes the deductions off your tax bill and repays anything over.
• Limited companies. Send an Employer Payment Summary (EPS) alongside your payroll submission with the CIS deductions for the year to date. HMRC sets them against your PAYE bill. Leftover deductions carry forward within the tax year, and after the year ends you claim a refund. Don't use the Corporation Tax return to claim them.

What is gross payment status, and can you get it?

Gross payment status means contractors pay you in full and you pay your own tax later. To get it, HMRC needs to see that you've paid tax and National Insurance on time in the past, that you do construction work in the UK, that the business runs through a bank account, and that your turnover over the last 12 months, ignoring VAT and materials, is at least:

• £30,000 if you're a sole trader
• £30,000 per partner, or £100,000 for the whole partnership
• £30,000 per director, or £100,000 for the whole company (£30,000 each where five or fewer people control it)

Since 6 April 2024 VAT compliance counts too, and from 6 April 2026 HMRC can remove the status straight away where a business knew or should have known a payment was connected to fraud. The full tests are in CIS gross payment status.

Does CIS apply alongside the VAT reverse charge?

Often, yes. The VAT domestic reverse charge applies when both sides are VAT-registered, the payment is reported under CIS, the work is standard or reduced-rated, and the customer hasn't told you in writing it's an end user. So most commercial subcontract invoices carry both: a CIS deduction on the labour and no VAT charged. The two rules work separately. CIS is income tax collected early; the reverse charge moves who pays VAT to HMRC. If you invoice through Xero, see setting up CIS and the reverse charge in Xero.

This guide covers the rules as HMRC states them. If you're unsure whether someone is a subcontractor or an employee, or which side of CIS a job sits on, ask your accountant before the return goes in.

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For CIS, Nexley reads each subcontractor invoice that lands in WhatsApp or email, splits labour from materials, works out the deduction at the sub's verified rate and drafts the bill and the payment statement. On the sales side it adds the deduction and reverse charge wording to your invoices. You check the figures and approve before anything is sent or filed.

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Common questions

Sources

1. GOV.UK: Construction Industry Scheme (CIS)
2. GOV.UK: CIS 340, a guide for contractors and subcontractors
3. GOV.UK: Make deductions and pay subcontractors
4. GOV.UK: File your monthly returns
5. GOV.UK: CIS subcontractor, get paid
6. GOV.UK: Pay tax and claim back deductions
7. GOV.UK: How to get gross payment status
8. GOV.UK: Simplification and administrative improvements to CIS
9. GOV.UK: Budget 2025, overview of tax legislation and rates
10. GOV.UK: Check when you must use the VAT domestic reverse charge

Every rule, rate and date above was checked against these sources on the date shown at the top.