If you operate as a contractor in the UK construction industry, you have specific legal obligations under the Construction Industry Scheme (CIS). Managed by HM Revenue & Customs (HMRC), the CIS governs how contractors pay subcontractors and ensures that tax deductions are collected at source. Failing to meet these responsibilities can result in significant penalties, but by understanding the scheme’s requirements, you can remain compliant and avoid costly mistakes.
Understanding Your Role as a CIS Contractor
A contractor under CIS is any business or individual that pays subcontractors to carry out construction work. Even businesses not primarily involved in construction may be classified as contractors if they spend more than £3 million on construction in a 12-month period.
As a contractor, you are responsible for verifying subcontractors, deducting tax at the correct rate, submitting monthly returns to HMRC, paying deductions to HMRC, and keeping accurate records. These obligations fall on you—not your subcontractors.
Registering as a CIS Contractor
Before paying subcontractors, you must register as a CIS contractor with HMRC. This registration is mandatory and separate from other HMRC registrations such as PAYE or VAT. You can register online using HMRC’s CIS registration service. You will need your Unique Taxpayer Reference (UTR), your business name and address, and your National Insurance number if you are a sole trader.
You must wait for HMRC to confirm your contractor registration before you start making payments under CIS.
Verifying Subcontractors with HMRC
Each subcontractor must be verified with HMRC before you make their first payment under CIS. Verification confirms whether they are registered and which deduction rate applies: 20% for registered subcontractors, 30% for unregistered subcontractors, or 0% for subcontractors with gross payment status.
A common misconception is that simply obtaining a subcontractor’s UTR is sufficient. In reality, the contractor must formally verify each subcontractor with HMRC using the online system or approved commercial software.
For example, if you verify a subcontractor and HMRC confirms they are registered, you must deduct 20% from their labour payment, excluding VAT and materials. If HMRC advises 30%, you must deduct at that higher rate until their registration status changes.
Deducting the Correct Amount from Payments
After verifying a subcontractor, you must calculate and deduct tax at the correct rate from their payments. Deductions apply only to the labour portion of the payment, excluding VAT and materials. Each payment must be accompanied by a payment and deduction statement provided to the subcontractor, showing the gross amount, the deduction, the net payment, and both parties’ details.
For example, if you owe a subcontractor £1,000 for labour, plus £200 VAT and £300 materials, the deduction applies only to £1,000 minus £300 (materials). You deduct 20% from £700, which equals £140. You then pay the subcontractor £1,360: the gross £1,000, minus £140 deduction, plus £200 VAT and £300 materials.
Filing Monthly CIS Returns
As a CIS contractor, you must file a CIS return every month reporting all payments made to subcontractors and all deductions taken during the previous tax month (running from the 6th to the 5th). Returns can be filed online via HMRC’s CIS online service or through approved commercial CIS software.
Each return must include a declaration confirming that the subcontractors listed are not employees. Providing incorrect employment status may result in a penalty of up to £3,000.
The deadline for filing your return is the 19th of the month following the tax month end. For example, a return covering 6 May to 5 June must be submitted by 19 June. Missing this deadline triggers automatic penalties:
- 1 day late: £100
- 2 months late: £200
- 6 months late: £300 or 5% of CIS deductions (whichever is higher)
- 12 months late: £300 or 5% of CIS deductions (whichever is higher)
- Beyond 12 months: up to £3,000 or 100% of CIS deductions (whichever is higher)
If you did not pay any subcontractors during a tax month, you must notify HMRC that no return is due. Failure to notify can still lead to penalties. You can notify HMRC of no activity online, by phone, or in writing.
Alternatively, if you expect not to use subcontractors temporarily, you can request inactivity status for up to six months using the CIS online service. This suspends your filing requirement during that period. If you resume using subcontractors sooner, you must inform HMRC immediately.
If you file returns using commercial software, ensure that no negative values are reported. If any entry calculates to less than zero, it must be reported as zero. HMRC may request explanations later for any such adjustments.
If you need to correct an error on a submitted return, you can do so through the HMRC CIS online service or by contacting the CIS helpline.
Who Pays CIS to HMRC?
Contractors are responsible for paying CIS deductions to HMRC. After deducting tax from subcontractors’ payments, you must send these deductions to HMRC by the due date. Subcontractors do not pay this tax directly; it is collected and remitted by you as the contractor.
Payment must be made by the 22nd of the month if paying electronically, or by the 19th if paying by post, following the end of the tax month. Late payments may result in interest charges and penalties.
Maintaining Accurate CIS Records
HMRC requires contractors to keep detailed CIS records for at least three years. These records include subcontractor verification details, payment and deduction statements, CIS returns, invoices, and receipts. Accurate records protect you in the event of an HMRC inspection and ensure you can reconcile payments, deductions, and returns.
Is It Better to Be CIS or PAYE?
This question mainly applies to subcontractors rather than contractors. Under CIS, subcontractors are treated as self-employed and can claim expenses through self-assessment. PAYE treats workers as employees with tax and National Insurance deducted at source, along with employment rights such as holiday pay and sick pay.
For contractors, there is no choice: if you pay subcontractors for construction work, you must operate CIS where applicable. If you directly employ workers, PAYE rules apply.
Staying Compliant and Avoiding Penalties
Compliance with CIS is an ongoing responsibility. Rules and thresholds may change, so it is important to monitor HMRC updates and seek advice from a tax professional when necessary. Penalties for non-compliance can be severe: for example, failing to submit a return even by one day results in a £100 penalty, which escalates the longer it remains outstanding.
Stay Compliant and In Control of Your Finances with Planyard
Meeting your responsibilities under CIS is about more than filing returns—it’s about maintaining accurate records, paying subcontractors correctly, and avoiding costly mistakes. Planyard simplifies CIS-aligned financial management by automating subcontractor billing, verifying payments against contracts, tracking retentions, and keeping every deduction clearly organized.
Designed for contractors who want real-time visibility and compliance confidence, Planyard replaces spreadsheets with a centralized platform for managing budgets, purchase orders, invoices, and subcontractor payment applications. With automated cost tracking, easy approvals, and live CVR reporting, you’ll stay compliant with CIS while keeping your projects profitable and admin under control.
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