The Construction Industry Scheme (CIS) is a key part of HMRC’s system for managing tax in the construction sector. If you’re a contractor or subcontractor in the UK, understanding how CIS works is essential—not only for staying compliant, but also for managing your cash flow and avoiding costly penalties.
In this guide, we’ll explain who CIS applies to, how it works, and how to stay on top of your obligations with ease.
What Is the Construction Industry Scheme?
CIS is a tax deduction scheme introduced by HMRC for the construction industry. Under the scheme, contractors deduct money from subcontractors’ payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance.
CIS aims to reduce tax evasion in the sector and ensure that subcontractors pay the correct amount of tax.
Who Needs to Register?
CIS applies to most construction work in the UK, including building, demolition, repairs, and civil engineering.
- Contractors must register if they pay subcontractors for construction work.
- Subcontractors should register to avoid higher deduction rates and to ensure any tax paid is correctly recorded.
If you’re both—i.e., you subcontract work and also take on jobs from other contractors—you must register as both a contractor and a subcontractor.
How the Deduction Process Works
When a contractor hires a subcontractor, they must first verify them with HMRC to determine the correct deduction rate. There are three possible outcomes:
- 0% (Gross Payment Status) – if the subcontractor is approved for gross payment
- 20% – the standard deduction rate for registered subcontractors
- 30% – the rate for unregistered subcontractors
Once verified, the contractor must deduct the correct amount from the subcontractor’s payment and submit it to HMRC. Contractors also need to provide a monthly CIS statement to the subcontractor, showing how much has been deducted.
Contractors must file a monthly CIS return with HMRC—even if they haven’t made any payments that month.
Why This Matters for Subcontractors
For subcontractors, the deductions made under CIS can significantly impact cash flow. If you’re not registered, the 30% deduction rate can quickly eat into your earnings. Even at 20%, it’s important to keep track of deductions so you can reclaim overpaid tax or offset it against your Self Assessment or Corporation Tax bill.
If you qualify for gross payment status, HMRC won’t make any deductions, meaning you receive full payment and settle your tax at year-end. However, to keep this status, you must keep your tax affairs in order and meet filing deadlines.
Staying Compliant and Avoiding Penalties
CIS can be time-consuming, especially when you’re managing multiple subcontractors, invoices, and deadlines. Failing to verify subcontractors, report payments correctly, or submit monthly returns can lead to penalties from HMRC.
That’s why it’s crucial to have a system in place—or better yet, professional support—to manage your CIS obligations accurately and on time.
How Majestic Accountants Can Help
At Majestic Accountants, we help contractors and subcontractors across the construction industry stay fully CIS-compliant. From monthly submissions and deduction statements to managing tax reclaim processes and applying for gross payment status, we handle the admin—so you can focus on the job.