The Construction Industry Scheme looks simple enough, take a slice off the subbie, send it to HMRC, right up until you're the one making the deductions. Then it's verifications, deduction rates, materials, monthly returns and statements, all with penalties attached if you get the timing wrong.
Here's CIS in plain English: what it is, the three deduction rates, what you actually deduct from, and the monthly duties that keep you on the right side of HMRC.
What CIS actually is
Under the Construction Industry Scheme, a contractor deducts money from a subcontractor's payment and pays it to HMRC. Those deductions are an advance payment towards the subcontractor's own tax and National Insurance, they're not an extra tax, and they're not the contractor's money. You're simply collecting it on HMRC's behalf.
One thing that trips people up: plenty of building firms are both at once. You're a contractor when you pay subbies, and a subcontractor when a main contractor pays you. Both sets of rules can apply to the same business in the same month.
The three deduction rates
How much you deduct depends entirely on the subcontractor's status with HMRC:
That gap between 30% and 20% is exactly why verification matters, pay an unverified subbie and you must deduct 30%, which lands badly with the subcontractor and creates hassle for everyone.
What you deduct from (it's not the whole invoice)
The deduction only applies to the labour element. You take off certain costs first and deduct from what's left. Excluded from the calculation are:
- Materials the subcontractor actually paid for
- VAT charged (though most construction supplies now fall under the VAT reverse charge)
- Plant hire, fuel for plant, and certain consumables
A quick worked example
A verified (20%) subcontractor sends you an invoice for £5,000, of which £1,000 is materials:
| Total labour + materials | £5,000 |
| Less materials (excluded) | − £1,000 |
| Labour subject to CIS | £4,000 |
| CIS deduction at 20% | − £800 |
| Paid to subcontractor | £4,200 |
You pay the subbie £4,200 and send the £800 to HMRC.
Getting the materials split right matters. Overstate materials and you under-deduct; ignore them and you over-deduct and squeeze the subcontractor's cash flow. Ask for invoices that show the split clearly.
Your monthly duties as a contractor
CIS runs to a monthly rhythm, and the dates are firm:
- Verify new subcontractorsCheck their status with HMRC before you pay them for the first time.
- Deduct at the right rate30%, 20% or 0% depending on their verified status.
- File your CIS return by the 19thReport every subcontractor payment for the tax month (6th to 5th) by the 19th of that month, even a "nil" return if you paid no one.
- Give a deduction statementEvery subcontractor you've deducted from gets a payment and deduction statement, so they can reclaim it.
- Pay HMRCSend the deductions to HMRC, usually by the 22nd (electronically).
Miss a monthly return and the penalties start immediately: £100 the day it's late, climbing the longer it's outstanding, and they apply even to nil returns you forgot to file. It's one of the easiest penalties to rack up and the easiest to avoid with a system.
If you're on the receiving end (the subcontractor)
Those deductions aren't lost money, they're credited against your tax bill. But how you get them back depends on your structure:
- Sole traders and partnerships claim the deductions through their Self Assessment tax return, often ending up with a refund.
- Limited companies offset CIS suffered against the PAYE and CIS they owe as an employer through their payroll each month.
The catch is cash flow: many subcontractors have far more deducted across the year than they actually owe, leaving money tied up with HMRC until it's reclaimed. Keeping your records tidy, and reclaiming promptly, is how you get that cash back where it belongs.
Gross payment status: worth having
If you qualify for gross payment status, contractors pay you in full with no deduction, and you settle your own tax through your normal returns. It's a real cash-flow advantage. You have to pass HMRC's turnover, business and compliance tests to get it, and keep your filings and payments spotless to keep it, but for a growing firm it's usually well worth pursuing.
CIS a monthly headache?
Book a free, no-obligation discovery call. We handle CIS verification, returns and statements for building contractors, so it's just done, on time, every month.
Schedule a CallThis article is general guidance for building contractors, not advice for your specific situation. CIS has plenty of edge cases, always check your own circumstances with your accountant before acting.
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