CIS (Construction Industry Scheme) Explained for Subcontractors

The Construction Industry Scheme is a set of HMRC rules that require contractors in the construction industry to deduct money from payments to subcontractors and pass it to HMRC. These deductions count as advance payments towards the subcontractor's tax and National Insurance liability. The scheme exists because HMRC historically found high levels of tax non-compliance in the construction sector.\n\nCIS applies to all construction work in the UK, including building, decorating, repairs, demolition, civil engineering, and installation of heating, lighting, power, water, and ventilation systems. This means it covers virtually every trade: builders, plumbers, electricians, plasterers, carpenters, roofers, painters, tilers, and many others. If you work as a subcontractor for a construction contractor, CIS almost certainly applies to you.\n\nThe scheme does not apply to work on your own property, work for a homeowner directly where they do not act as a contractor, or certain types of work such as architecture, surveying, or purely professional services. However, if a homeowner engages you through a main contractor, CIS deductions will apply to payments from that contractor to you.\n\nUnder CIS, contractors must verify subcontractors with HMRC before making payments, make the appropriate deductions, and submit monthly returns to HMRC showing all payments and deductions. As a subcontractor, the deductions are not a tax in themselves but an advance payment that reduces your Self Assessment tax bill at the end of the year.

If you work as a subcontractor in construction, you should register for CIS with HMRC. Registration is not technically mandatory, but the consequences of not registering are significant: unregistered subcontractors have deductions made at 30 percent of their payments, whereas registered subcontractors are deducted at 20 percent or potentially 0 percent with gross payment status.\n\nTo register, call the CIS helpline on 0300 200 3210 or register online through your Government Gateway account. You will need your UTR number, National Insurance number, and details of your business. The registration is usually processed within a few days, and HMRC will confirm your registered status and deduction rate.\n\nOnce registered at the standard rate, your contractor will deduct 20 percent from the labour portion of each payment (materials costs are not subject to CIS deductions). For a 1,000 pound payment split as 700 pounds labour and 300 pounds materials, the CIS deduction would be 20 percent of 700 pounds, which is 140 pounds. You receive 860 pounds, and the 140 pounds goes to HMRC against your tax bill.\n\nGross payment status allows you to receive the full payment without any deductions. To qualify, you must demonstrate a good compliance record with HMRC, including filing all tax returns on time, paying all tax liabilities on time, and meeting a minimum turnover test of 30,000 pounds per year for sole traders. Gross payment status is reviewed by HMRC annually, and it can be withdrawn if your compliance record slips.

CIS deductions are not lost money. They are advance payments of your income tax and National Insurance that are credited to your Self Assessment account when you file your return. If the total CIS deductions made during the year exceed your actual tax liability, HMRC will refund the difference.\n\nOn your Self Assessment return, CIS deductions are entered in a specific section of the SA100 main form. You will need CIS payment and deduction statements from every contractor you worked for during the year, showing the gross payment, the deduction amount, and the net payment you received. Contractors are required to provide these statements, and you should keep them with your tax records.\n\nTo claim credit for CIS deductions, your declared income on the SA103F must match the gross amounts shown on your CIS statements. HMRC cross-references the figures, and discrepancies will delay processing of your return or trigger queries. TradeTally allows you to log CIS deduction statements as you receive them, tracking both the gross income and the deductions separately so your return figures are accurate.\n\nIt is common for subcontractors, especially in their first year, to find that CIS deductions cover most or all of their tax liability, resulting in a refund. This depends on your total profit level and expenses. A subcontractor with 30,000 pounds gross income and 8,000 pounds in expenses might have a tax and NI liability of around 3,800 pounds but CIS deductions of 4,400 pounds (20 percent of the labour portion), resulting in a refund of approximately 600 pounds.

If you engage subcontractors, you are a contractor under CIS and have specific obligations. You must register as a contractor with HMRC, verify every subcontractor before you first pay them, make the correct deductions from payments, submit a monthly CIS return to HMRC by the 19th of each month, and provide payment and deduction statements to your subcontractors.\n\nVerification is done online through HMRC's systems or by calling the CIS helpline. You provide the subcontractor's name, UTR, and National Insurance number, and HMRC tells you the correct deduction rate: 0 percent for gross payment status, 20 percent for registered subcontractors, or 30 percent for unregistered subcontractors. You must verify each new subcontractor before the first payment.\n\nMonthly CIS returns must be submitted even if you made no payments to subcontractors in that period. A nil return is required each month you are registered as a contractor. Late submission of monthly returns incurs penalties starting at 100 pounds for one day late, 200 pounds after two months, 300 pounds or 5 percent of the deductions after six months, and further penalties at twelve months.\n\nFor tradespeople who occasionally subcontract work to other sole traders, these obligations can feel burdensome, but they are legally required whenever you pay another person for construction work. TradeTally helps manage CIS contractor obligations by tracking subcontractor payments, calculating deductions, and reminding you of monthly return deadlines.

One of the most common problems subcontractors face is incorrect deductions. If a contractor deducts at 30 percent instead of your registered 20 percent rate, it usually means they failed to verify you correctly with HMRC, or your registration has lapsed. Contact the contractor immediately and ask them to re-verify you. Going forward, deductions should be at the correct rate, though you cannot retroactively change past deductions. You will recover the overpayment when you file your tax return.\n\nAnother frequent issue is not receiving CIS payment and deduction statements from contractors. Without these, you cannot claim credit for the deductions on your tax return. Contractors are legally required to provide statements within 14 days of the end of each tax month. If they fail to do so, keep your own records of payments received and deductions made, and report the contractor to HMRC if necessary.\n\nLosing gross payment status is a serious inconvenience that can disrupt your cash flow. HMRC reviews gross payment status annually and can revoke it if you miss a tax return deadline, make a late payment, or fail to meet the turnover threshold. If your status is revoked, you revert to 20 percent deductions, and you must wait twelve months before reapplying. Maintaining an impeccable compliance record is essential.\n\nDisputes about whether work falls within CIS can also arise. If a contractor insists on making CIS deductions from payments for work you believe is outside the scheme, such as professional services or manufacturing, HMRC can adjudicate. Document the nature of the work clearly in your contracts and invoices to minimise ambiguity.