What is CIS?
The Construction Industry Scheme (CIS) is a tax collection framework operated by HMRC to minimise tax evasion across the UK construction sector. Under the scheme, contractors deduct tax at source from payments made to subcontractors for construction work and pay those deductions directly to HMRC. These deductions count as advance tax and National Insurance payments toward the subcontractor’s ultimate tax liabilities.
Whether you operate as a sole trader, partnership, or limited company in construction, navigating CIS rules, deduction rates, and VAT interactions is essential to protecting your working capital and staying compliant with HMRC.
Am I a Contractor or a Subcontractor?
A business or individual can be a contractor, a subcontractor, or both under CIS rules:
- Contractor: You are a contractor if you pay subcontractors to perform construction work on your behalf, or if your business spends an average of more than £3 million on construction over a 12-month period (known as a “deemed contractor”).
- Subcontractor: You are a subcontractor if you perform construction work for a contractor.
- Both: If you win a construction contract and subcontract parts of the work to other tradespeople or firms, you fall into both categories and must register as both a contractor and a subcontractor.
Do I Need to Register for CIS with HMRC?
If you pay subcontractors for construction work, registration as a contractor is legally compulsory before you make your first payment.
If you are a subcontractor, registration is technically voluntary, but failing to register results in a 30% tax deduction from the labour portion of your invoices instead of the standard 20% rate. Registering with HMRC ensures you are taxed at the correct rate and can access Gross Payment Status if eligible.
What Types of Work Fall Under CIS?
CIS covers most construction work carried out on permanent or temporary buildings, structures, and civil engineering works (including roads, bridges, and infrastructure). Covered work includes site preparation, demolition, structural alterations, repairs, systems installation, and finishing work.
However, specific activities are explicitly exempt from CIS rules:
- Scaffolding hire where no labour is provided.
- Carpet and linoleum fitting.
- Manufacturing materials, prefabricated components, or plant machinery used in construction.
- Delivering materials or plant hire without an operator.
- On-site non-construction services, such as operating a canteen or providing security.
- Professional services, including architecture, quantity surveying, and structural engineering.
Detailed breakdowns of covered and exempt activities are available in HMRC’s CIS 340 Guide.
Subcontractor CIS Deduction Rates & Gross Payment Status (GPS)
When you invoice a contractor, you must provide your Unique Taxpayer Reference (UTR) and national insurance/company registration details so the contractor can verify your status with HMRC before payment.
HMRC instructs the contractor to apply one of three deduction rates to the labour element of your invoice (materials, equipment hire, and VAT are excluded from CIS deductions):
| CIS Status | Deduction Rate | How It Works |
|---|---|---|
| Gross Payment Status (GPS) | 0% | Contractor pays 100% of the invoice gross. You pay tax later via Self Assessment or Corporation Tax. |
| Registered Subcontractor | 20% | Contractor deducts 20% from the labour element and remits it to HMRC as tax paid in advance. |
| Unregistered Subcontractor | 30% | Higher deduction rate applied due to lack of HMRC registration. |
Applying for Gross Payment Status (0% Deduction)
Subcontractors can apply for Gross Payment Status (GPS) to receive payments without any tax deductions. To qualify, your business must pass three HMRC tests:
- Business Test: Carrying out construction work in the UK via a bank account.
- Turnover Test: Net construction turnover (excluding VAT and materials) of at least £30,000 per partner/director, or £100,000 for a company.
- Compliance Test: A clean tax history across Income Tax, Corporation Tax, PAYE, and VAT compliance. HMRC actively monitors VAT and tax compliance and has powers to revoke GPS immediately if serious defaults occur.
How to Reclaim CIS Deductions Suffered
Contractors who deduct CIS must issue you a monthly Payment and Deduction Statement (PDS) showing total invoice amounts, materials costs, and tax deducted. Retaining these statements is vital for reclaiming your tax deductions:
For Sole Traders and Partnerships:
Deductions suffered are reported on your annual Self Assessment tax return. The total CIS tax withheld is deducted from your overall Income Tax and Class 4 National Insurance calculation, generating a tax refund if total deductions exceed your liability.
For Limited Companies:
Limited company subcontractors do not claim CIS suffered on their Corporation Tax Return (CT600). Instead, CIS suffered is offset month-by-month against payroll liabilities (PAYE, Employer NI, Employee NI, and CIS contractor deductions) via the payroll Employer Payment Summary (EPS) submitted to HMRC. If total CIS deductions suffered exceed your monthly payroll liabilities, the excess carries forward across the tax year. Any remaining un-offset CIS credit at tax year-end can be requested as a cash refund or offset against Corporation Tax through HMRC’s PT Operations.
The VAT Domestic Reverse Charge (DRC) for Construction
If you are a VAT-registered business supplying CIS-regulated construction services to another VAT-registered business, the VAT Domestic Reverse Charge (DRC) applies.
Under DRC rules, the subcontractor does not charge or collect output VAT on qualifying invoice services. Instead, the invoice states that DRC applies, and the contractor accounts for both the output and input VAT on their own VAT return. This eliminates cash flow fraud across the construction supply chain and prevents subcontractors from collecting VAT that isn’t remitted to HMRC.
Contractor Obligations & Monthly Returns
If you hire subcontractors, you must fulfil strict monthly reporting duties:
- Verify Subcontractors: Check each subcontractor’s tax status with HMRC before paying them.
- Issue Payment Statements: Provide a written Payment and Deduction Statement (PDS) to subcontractors within 14 days of the end of each tax month.
- Submit Monthly Returns (Form CIS300): File your monthly CIS return and pay all withheld tax to HMRC by the 19th of every month.
- Compulsory Monthly Reporting: Contractors are required to submit monthly CIS returns continuously—including filing compulsory nil returns for months where no subcontractors were paid. Missing monthly filing deadlines incur automatic £100 late-filing penalties, escalating over time.
Get Expert CIS Support from MNE Accounting
Managing CIS compliance, verifying subcontractors, reconciling monthly EPS offsets, and handling VAT Domestic Reverse Charge rules requires technical accuracy. At MNE Accounting, our specialist construction accountants take the administrative burden off your hands, ensuring your CIS returns are filed on time and your tax recovery is maximised.
Need help with CIS registration, Gross Payment Status applications, or monthly payroll returns? Contact MNE Accounting today or call 0116 255 2422 to speak with our construction tax specialists.
Frequently Asked Questions About the Construction Industry Scheme (CIS)
Can a limited company subcontractor claim CIS deductions back through Corporation Tax?
No. Limited company subcontractors offset CIS deductions suffered against their monthly PAYE, National Insurance, and contractor liabilities via their Employer Payment Summary (EPS) payroll filings. Any unused balance at the end of the tax year can then be claimed as a cash refund or offset against Corporation Tax through HMRC.
What happens if a contractor fails to file a monthly CIS return on time?
HMRC charges an automatic £100 late-filing penalty if a CIS return is missed on the 19th of the month. Penalties increase to £200 at two months late, plus £300 or 5% of the tax liability at 6 and 12 months late.
How does the VAT Domestic Reverse Charge affect CIS invoices?
For qualifying construction services between VAT-registered businesses in the supply chain, the subcontractor does not charge VAT on their invoice. Instead, the invoice notes that the Domestic Reverse Charge applies, and the contractor accounts for the VAT on their own return. CIS tax deductions are calculated solely on the net labour figure before VAT.
