What is CIS and how does it work?

CIS, the Construction Industry Scheme, is HMRC’s tax deduction scheme for UK construction. Contractors deduct 20% from payments to registered subcontractors, 30% from unregistered ones and nothing from those with gross payment status, then pass the money to HMRC as an advance on the subcontractor’s tax and National Insurance. Deductions apply to labour only, not to materials or VAT.

This guide is for self-employed tradespeople, growing construction firms and anyone running CIS through Xero or QuickBooks.

What is CIS?

CIS is HMRC’s way of cutting tax evasion in construction. Contractors are legally required to deduct money from what they pay subcontractors and send it to HMRC as an advance on the subcontractor’s income tax and National Insurance. It covers construction services only; employees are outside it.

For a subcontractor, getting CIS right is mostly about cash flow. Register, and you lose 20% of your labour rather than 30%. Qualify for gross payment status, and you lose nothing until your tax bill is due.

Who needs to register for CIS?

Contractors

You must register as a contractor if you pay subcontractors for construction work. You also have to register if you spend more than £3 million on construction over a rolling 12 months, even if construction isn’t your business. Property developers, housing associations and facilities managers often fall in through that second test.

Registering is a legal obligation, and it keeps you clear of HMRC penalties and audits.

Subcontractors

If you do construction work for a contractor, you should register. Staying unregistered doesn’t take you out of CIS. The contractor simply deducts 30% instead of 20%.

Registration is also the route to gross payment status and its 0% rate. A registered CIS record tends to help when you apply for a mortgage, loan or credit, and contractors take it as a sign you are properly set up.

Businesses that do both

If you hire subcontractors and also work as one, you must register as both a contractor and a subcontractor.

What work is covered by CIS?

More than most people expect. The trades are in, and so is a lot of the work around them:

If you’re not sure about your service, check HMRC’s CIS 340 guide (last checked October 2026) or ask HMRC. Guessing wrong can lead to fines or disputes.

CIS in Scotland and Wales

CIS works the same across the UK. Scotland has its own income tax bands and Wales applies the Welsh Rate of Income Tax, but contractors still deduct 20% or 30% at the point of payment, wherever you are.

The difference shows up at year end. If you’re a Scottish subcontractor, HMRC works out whether you’ve overpaid or underpaid using Scottish bands when you file your Self Assessment, and the same goes for Welsh rates in Wales. Depending on how much was deducted, you may owe more or get a bigger refund.

Does CIS apply to overseas businesses?

Yes. What counts is where the work is done, not where your company is based. A foreign contractor working on UK sites, a non-UK subcontractor hired by a UK contractor and a company sending workers to the UK for a project are all in scope.

The usual mistake is assuming non-residency exempts you. Many international subcontractors also overpay tax and never claim it back. To claim, you’ll need your CIS statements, proof of UK income and expense records.

A tax treaty between the UK and your home country may change what you owe, so check with a UK tax adviser to avoid being taxed twice.

Employment status under CIS

Being paid under CIS doesn’t make you an employee, and the payslip-style statements you get aren’t payslips. As a subcontractor you get no holiday pay, sick pay or employment protection, and your tax and records are your own job.

Contractors have to check employment status. If you work only for one contractor, under close supervision and with their materials, HMRC may treat you as an employee for tax whatever your contract says. Getting this wrong brings penalties and can sour the working relationship.

Registering with HMRC

As a subcontractor

1. Get a UTR (Unique Taxpayer Reference)
2. Register for Self Assessment
3. Register for CIS, either at the same time or afterwards

As a contractor

Register with HMRC as a CIS contractor, verify every subcontractor before you pay them, and send a return every month, including nil returns in months with no payments.

CIS deduction rates

The deduction never applies to VAT or to materials and plant hire shown separately on the invoice. Many contractors self-bill, so check their documents against your own records.

Gross payment status

With gross payment status (GPS), contractors pay you in full with no tax or National Insurance taken off. It isn’t automatic. You need to file your tax returns on time, keep a clean compliance record with HMRC and meet the turnover test, typically £30,000 a year for individuals.

The gain is cash flow. You get the full invoice upfront to cover materials and wages, and you decide when to pay your tax. Contractors also read GPS as a sign you’re compliant and organised, which can help with bigger contracts.

HMRC reviews GPS every year, and one late return or missed payment can cost you it. You’d then go back to 20% deductions, or 30% if unregistered.

VAT and CIS

Since March 2021, most CIS-registered contractors and subcontractors come under the VAT domestic reverse charge. As the subcontractor you don’t charge VAT; the contractor accounts for it on their own VAT return. HMRC brought it in to cut fraud, but mixed with CIS deductions it confuses people.

Your invoice still shows the VAT rate and amount, marked as reverse charge, so the contractor knows the VAT is theirs to deal with. The CIS deduction is worked out on the labour only, before VAT. Materials are paid in full, and the VAT figure is there for reporting, not for deduction.

Make sure your accounting software, or your accountant, handles the two together. Otherwise the deductions, payments or VAT return will come out wrong.

Worked example

You invoice £1,000 of labour and £200 of materials. The invoice shows £240 VAT at 20% under the reverse charge, which the contractor reports. The CIS deduction is 20% of the £1,000 labour, so £200.

The contractor pays you £1,000 + £200 – £200 = £1,000. The £240 VAT isn’t part of the payment to you.

Claiming a CIS refund

Sole traders

1. File a Self Assessment return
2. Enter your gross income, not the net payments you received
3. Include your expenses and the CIS deducted
4. HMRC works out the overpayment and refunds it

Refunds are common because CIS deductions ignore your personal allowance and business expenses. It can run to thousands.

Limited companies

Record the CIS suffered in your payroll or accounting system and file a monthly EPS to set it against PAYE. Anything left at year end can be reclaimed with HMRC’s online CIS repayment form. Get an accountant involved if you’re setting it against Corporation Tax.

Deregistering from CIS

Contractors who stop using subcontractors, and subcontractors who stop working in construction, must deregister. You can do it in any of these ways:

• Call HMRC on 0300 200 3210
• Use your online HMRC account
• Write to HMRC at BX9 1BX

Keep filing monthly returns until HMRC confirms the deregistration.

Examples

Gregory and Stephan

Gregory is registered, so Builders Ltd deducts 20% from his labour only. Stephan isn’t registered, and 30% comes off his full labour fee.

Ben’s tax refund

Which Software Handles CIS?

Contractors verify subcontractors, work out deductions and file the monthly CIS300 return in their accounting software or a dedicated CIS tool. HMRC’s own CIS online service handles verification and returns for free, but it does not calculate deductions. Our comparison of CIS software covers the paid options and what each plan includes.

Planyard is our product, and it does not file CIS returns. It works one step earlier: it sets the labour and materials split on each subcontract order, tracks applications and retention, and posts approved bills to Xero, QuickBooks or Sage. The ledger then works out the deduction and files the return from bills that are already split correctly.