Construction Industry Scheme (CIS) UK 2025 Guide

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a UK tax deduction scheme that applies to payments made by contractors to subcontractors in the construction industry. Introduced in 1971 and substantially reformed in 2007, CIS exists because construction subcontractors historically had high rates of tax non-compliance. Rather than waiting for subcontractors to pay their own tax bills, HMRC requires contractors to collect tax at source and pay it directly.

CIS covers a wide range of construction work including: building work, alterations, repairs, decorating, civil engineering, installation of systems (heating, lighting, air conditioning, CCTV), groundwork, landscaping, and demolition. It does not generally apply to professional work such as architecture, surveying, or facilities management, nor to manufacturing off-site.

Who CIS Applies To

Contractors Under CIS

You are a contractor under CIS if:

• You carry on a business in the construction industry and pay subcontractors for construction work; or
• Your average annual expenditure on construction work over the past three years exceeds £3 million — even if construction is not your main business. These are called deemed contractors and include property developers, local authorities, housing associations, and NHS trusts.

Subcontractors Under CIS

You are a subcontractor if you are paid by a contractor to carry out construction work. Subcontractors can be sole traders, partnerships, or limited companies. Employment status matters: genuinely employed workers are on PAYE — CIS only applies to the genuinely self-employed and company subcontractors.

CIS Deduction Rates 2025/26

Important: The deduction applies only to the labour portion of the payment. Genuine materials costs and equipment hire are excluded from the deduction base. The contractor must separate the invoice into labour and materials — if the subcontractor cannot evidence material costs, HMRC may treat the whole payment as labour.

Contractor Obligations: Step by Step

1. Register as a CIS Contractor

Before making any payments under CIS, contractors must register with HMRC as a CIS contractor via the Government Gateway. This is separate from your normal payroll or VAT registration. Once registered you receive access to HMRC's CIS Online service to verify subcontractors and file monthly returns.

2. Verify Every Subcontractor

Before making the first payment to a subcontractor — and every time you engage a new one — you must verify them with HMRC. Verification can be done:

• Online via HMRC's CIS Online service (most common)
• By phone on 0300 200 3210
• Via CIS-compatible payroll or accounting software

HMRC will tell you the subcontractor's payment status: gross, standard (20%), or unmatched (30%). You must apply the rate HMRC specifies — not what the subcontractor claims.

3. Make the Correct Deduction

When you pay a subcontractor, calculate the CIS deduction on the labour element of the gross payment (before VAT). Pay the subcontractor the net amount, then remit the CIS deduction to HMRC. VAT is always paid on top and is unaffected by CIS.

4. Give Subcontractors a CIS Statement

Each time you make a CIS deduction, you must give the subcontractor a CIS payment and deduction statement showing the gross payment, materials deducted, CIS deduction, and net payment. This can be in paper or electronic form. You must provide it within 14 days of the end of each tax month (5th of each month).

5. File the Monthly CIS Return

By the 19th of each month, contractors must file a CIS return with HMRC covering all payments made to subcontractors during the previous tax month (6th to 5th). The return must include:

• Name, UTR and National Insurance number of each subcontractor paid
• Gross payment made, materials allowed, and CIS deduction for each
• A declaration that the subcontractor's employment status has been considered

You must file even if you made no payments that month (unless HMRC has agreed a nil-return holiday). Late filing attracts an immediate £100 penalty.

6. Pay the CIS Deductions to HMRC

CIS deductions must be paid to HMRC by the 19th of the month following the tax month (22nd if paying electronically). This payment is made alongside employer PAYE if you also have employees, and both go through the Employer Payment Summary (EPS) system.

Contractor Worked Example

Subcontractor Take-Home After CIS

CIS deductions are not a final tax — they are advance payments against the subcontractor's Self Assessment liability. At the end of the tax year, the subcontractor files a Self Assessment return and HMRC calculates the actual income tax and Class 4 NIC owed. Any CIS already deducted is credited against this bill. If CIS deductions exceed the tax owed, HMRC issues a refund.

Reclaiming CIS Through Self Assessment

1. Collect all CIS payment and deduction statements from your contractors throughout the year.
2. Enter total CIS suffered in your Self Assessment return (SA100, Employment or Self-Employment supplementary pages).
3. HMRC sets off CIS against your tax bill. If you owe £5,000 in tax but have suffered £7,000 CIS deductions, HMRC will refund £2,000.
4. Online Self Assessment refunds typically arrive within 5 working days once processed.

Limited company subcontractors reclaim CIS through their Corporation Tax return (CT600), offsetting CIS suffered against PAYE due on the company payroll, or applying for a repayment directly from HMRC.

Gross Payment Status

If your business passes HMRC's compliance tests, you can apply for gross payment status, meaning contractors pay you in full without making any CIS deduction. This has significant cash-flow benefits for larger subcontractors.

Gross Payment Status Criteria

• Business test: You must be carrying on a construction business in the UK. For sole traders, annual net CIS turnover must be at least £30,000 (£100,000 for a company with three or more directors, proportionately reduced for fewer directors).
• Compliance test: All tax returns (Self Assessment, VAT, PAYE, Corporation Tax) and payments must be up to date. One or two minor historic failures can be overlooked but patterns of late filing will fail the test.
• 12-month compliance history: HMRC reviews the most recent 12 months for any serious compliance failures.

Apply via the Government Gateway CIS service or form CIS302 for sole traders. HMRC reviews annually and can withdraw gross payment status at any time if compliance deteriorates. Loss of gross status is automatic if you fail to file a CIS return (as a contractor), fail to pay PAYE, or have a criminal conviction for tax fraud.

Deemed Contractors

Businesses outside the construction industry become deemed contractors if their average annual spend on construction operations over the preceding three years exceeds £3 million. Common examples include:

• Property developers and landlords with large refurbishment programmes
• Local authorities and NHS trusts commissioning building works
• Large retailers and hotel chains maintaining extensive property portfolios
• Housing associations

Deemed contractors have exactly the same obligations as mainstream contractors: verify subcontractors, deduct CIS, file monthly returns, and pay deductions to HMRC. Many are caught unaware — failing to comply can result in significant penalties and interest.

Materials vs Labour: Getting the Split Right

Since CIS applies only to labour, accurately splitting an invoice between labour and materials is important — and a frequent source of HMRC enquiry. Key rules:

• Materials must have actually been supplied and incorporated into the construction work.
• Plant and equipment hire is treated as labour (not materials) for CIS purposes unless the equipment is subsidiary to the main materials supply.
• Fuel used in plant is also excluded from the materials allowance.
• If a subcontractor simply provides a labour-only service with no materials, the full payment is subject to CIS.
• Contractors should request itemised invoices from subcontractors and may ask for receipts to substantiate materials claims.

Penalties for Non-Compliance

CIS and VAT: Domestic Reverse Charge

From 1 March 2021, the VAT domestic reverse charge applies to most construction services supplied between VAT-registered businesses in the CIS. Under reverse charge:

• The subcontractor does not charge VAT on their invoice.
• The contractor accounts for the VAT — both the output tax (Box 1) and the input tax (Box 4) — on their own VAT return.
• The net effect for VAT-registered contractors is usually nil, but it eliminates the risk of subcontractors collecting VAT and disappearing without paying it to HMRC (a form of "missing trader" fraud).

Reverse charge does not apply to supplies to end users (homeowners, businesses who do not onward sell construction services) or to supplies between connected parties under common ownership.