What is CIS and how does it work?

In an industry as competitive and compliance-heavy as construction, understanding the ins and outs of the Construction Industry Scheme (CIS) is more than just ticking boxes for HMRC—it can be the difference between running a streamlined, profitable business and being bogged down by cash flow issues, surprise tax bills, and regulatory fines.

This guide is built not just to explain the CIS—but to help you master it. Whether you’re a self-employed tradesperson, running a growing construction firm, or using accounting tools like Xero or QuickBooks, this article delivers practical insights into every critical aspect of the scheme.

What is CIS?

The Construction Industry Scheme (CIS) is a HMRC-regulated tax deduction system designed to combat tax evasion in the construction sector. Under CIS:

• Contractors are legally required to deduct money from payments to subcontractors.
• Deductions are sent to HMRC as advance contributions towards the subcontractor’s income tax and National Insurance.
• Only construction services are covered. Employees are excluded.

CIS is not an optional layer of bureaucracy. It’s an operational framework designed to formalise how tax flows through one of the UK’s most dynamic—and often fragmented—sectors. Subcontractors who understand how CIS works can not only avoid compliance risks but also turn their tax position into a cashflow advantage.

Who Needs to Register for CIS?

Contractors Must Register If:

• You pay subcontractors for construction work.
• You spend more than £3 million on construction over a 12-month rolling period, even if you’re not a construction business.

You might be a property developer, a housing association, or a facilities manager—if you’re commissioning construction work at scale, you fall within CIS.

Subcontractors Should Register If:

You carry out construction work for a contractor. Being unregistered doesn’t exempt you from the Construction Industry Scheme (CIS) — it simply means you’ll face a higher 30% deduction rate instead of the standard 20%, or 0% if you qualify for Gross Payment Status. Registering improves your cash flow and avoids unnecessary over-deductions.

Dual Role Businesses

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?

The scope of work covered by CIS is much broader than people often assume. It includes traditional trade skills but also many surrounding and enabling activities:

If you’re unsure whether your service is included, err on the side of caution and check CIS 340 or contact HMRC. Incorrect assumptions could lead to fines or disputes.

UK-Wide CIS Coverage, Including Scotland and Wales

CIS is UK-wide and applies equally across all counties. However, due to devolved income tax systems, how your final tax liability is calculated can differ:

• Scotland: Has its own income tax bands. CIS deductions are still made at 20%/30% but your final bill reflects Scottish tax rules.
• Wales: Applies the Welsh Rate of Income Tax. The principle is the same—CIS deductions apply UK-wide, but the reconciliation is devolved.

This adds complexity at year-end, but not at the deduction point:

For example, if you’re a Scottish subcontractor, the contractor will deduct the standard 20% (or 30% if unregistered), just like anywhere else in the UK. But when you submit your self-assessment, HMRC will calculate whether you’ve overpaid or underpaid tax using Scotland’s specific tax bands. This can lead to either an additional payment or a refund, depending on how much has been deducted.

In practical terms, this means:

• You don’t need to worry during monthly CIS payments — deductions work the same everywhere.
• But at year-end, you might owe more tax or be due a larger refund, depending on your local tax rules.

Does CIS apply to overseas businesses?

Yes. If your business is based outside the UK, but you’re carrying out construction operations within the UK, then CIS rules still apply. The location of the work—not the location of your company—determines whether CIS is required.

This applies whether you’re:

• A foreign contractor working on UK construction sites
• A non-UK subcontractor hired by a UK-based contractor
• A company sending your workers to the UK on a project basis

Pitfalls to Avoid

• Assuming non-residency exempts you – If the work is done in the UK, you’re in scope.
• Failing to claim refunds – Many international subcontractors overpay tax and don’t claim it back.
• Not keeping records – You’ll need CIS statements, proof of UK income, and expense records for compliance.

Pro tip: Tax treaties between the UK and your home country may impact your liability—check with a UK tax advisor to avoid double taxation.

Understanding Employment Status Under CIS

Being paid under CIS does not make you an employee. If you receive payslip-style statements, they are not traditional payslips. As a subcontractor:

• You don’t receive holiday pay, sick leave, or employment protections.
• You must manage your own taxes, record keeping, and compliance.

Contractors must perform employment status checks. A common red flag is exclusivity: if you work only for one contractor, under close supervision, using their materials, you may be an employee for tax purposes—regardless of what your contract says.

Misclassifying workers doesn’t just lead to financial penalties. It can destroy trust, cause project disruption, and result in reputational harm.

Registering with HMRC

As a Subcontractor

You need to:

• Obtain a UTR (Unique Taxpayer Reference)
• Register for Self Assessment
• Register separately for CIS (either at the same time or after)

As a Contractor

You must:

• Register with HMRC as a CIS contractor
• Verify every subcontractor you use
• Submit monthly returns (even nil returns)

CIS Deduction Rates

• 20%: Registered subcontractor
• 30%: Unregistered subcontractor
• 0%: Subcontractor with Gross Payment Status (GPS)

CIS deductions should never apply to:

• VAT on your invoice
• Separately itemised materials or plant hire

Pro tip: Many contractors use self-billing. Always check those documents match your own records.

Gross Payment Status: Unlocking Cash Flow

Gross Payment Status (GPS) allows you to get paid in full, without any tax or National Insurance deductions made by the contractor. This can make a big difference to your cash flow, but it’s not granted automatically. To qualify, you must meet certain conditions:

• File your tax returns on time
• Maintain a clean compliance record with HMRC
• Meet the minimum turnover threshold, typically £30,000 per year for individuals

Why GPS Matters

• You stay in control of when and how you pay your tax, rather than relying on advance deductions.
• Your cash flow improves because you receive the full invoice amount upfront, giving you more flexibility to cover materials, wages, and other business costs.
• It strengthens your professional reputation, showing contractors that you are compliant and well-organized — which can help you secure more or higher-value contracts.

Pro tip: Gross Payment Status is reviewed every year. Even one late tax return or missed payment can put this privilege at risk. If you lose GPS, you will return to the standard 20% or, if unregistered, 30% deduction system — which can significantly impact your cash flow. Once you have GPS, staying compliant becomes even more important.

VAT and CIS: How They Interact

Since March 2021, most CIS-registered contractors and subcontractors are affected by the VAT reverse charge rules. Here’s how it works:

• As the subcontractor, you do not charge VAT on your invoice.
• Instead, the contractor calculates and reports the VAT directly to HMRC on their own VAT return.

This system was introduced to improve transparency and reduce fraud, but it can understandably create some confusion when combined with CIS deductions.

What to Keep in Mind

• Show VAT clearly on your invoices, even under the reverse charge.
  You still need to display the VAT rate and amount on the invoice, but mark it as reverse charge — this alerts the contractor that they are responsible for handling the VAT.
• CIS is applied before VAT is considered.
  CIS deductions are calculated only on the labour portion of your invoice, and they are worked out on the pre-VAT amount.
• Materials and VAT are not part of CIS deductions.
  CIS applies to labour only. Materials are paid in full, and VAT (even under reverse charge) is shown for reporting purposes, not for deduction.
• Your accounting software must handle both correctly.
  Make sure your system or accountant understands how VAT reverse charge and CIS interact to avoid mistakes in deductions, payments, or tax reporting.

The Calculation Order: What Comes First?

1. First, calculate the VAT on your invoice.
   Even though you are not charging VAT, you still show the VAT amount on the invoice for reference — this signals to the contractor that they need to account for it under the reverse charge.
2. Next, apply CIS deductions — but only on the net (pre-VAT) labour amount.
   CIS tax is deducted before VAT is considered, meaning it is calculated on the amount before VAT is added.

Quick Example

• Labour: £1,000
• Materials: £200
• VAT (20% reverse charge): £240 (contractor reports this)
• CIS deduction (20% of £1,000): £200

The contractor pays you: £1,000 + £200 – £200 = £1,000 total. The £240 VAT is not included in the payment to you but is shown on the invoice for the contractor to report.

Claiming a CIS Refund Online

Sole Traders:

• File a Self Assessment return
• Enter your gross income (not net payments received)
• Include expenses and CIS deductions
• HMRC reconciles the overpayment and issues a refund

Refunds are common because CIS deductions do not account for personal allowances or business expenses. You might be owed thousands.

Limited Companies:

• Record CIS suffered in your payroll or accounting system
• File monthly EPS to offset against PAYE
• Year-end surplus can be reclaimed using HMRC’s online CIS repayment form

Professional support is advised—especially if you’re offsetting against Corporation Tax.

Deregistering from CIS

If you:

• Stop using subcontractors (contractor)
• Stop working in construction (subcontractor)

You must deregister by:

• Calling HMRC (0300 200 3210)
• Using your online HMRC account
• Writing to HMRC at BX9 1BX

Pro tip: Until you receive confirmation, you must keep filing monthly returns.

Real-World Examples

Gregory vs. Stephan

• Gregory is registered. Builders Ltd deducts 20% from labour only.
• Stephan is unregistered. 30% is deducted from his full labour fee.

Ben’s Tax Refund

• Invoiced £21,300 (labour, materials, tool hire)
• Expenses: £6,300
• Profit: £15,000
• CIS deducted: £3,600
• Final tax & NI: £631.80
• Refund due: £2,968.20

Strategic Benefits of CIS Registration

For Subcontractors:

• Improved cashflow (20% vs. 30% deduction)
• Smoother access to mortgages, loans, and credit
• Ability to apply for GPS and eliminate deductions
• Professional credibility with contractors

For Contractors:

• Meet legal obligations
• Avoid HMRC penalties and audits
• Build transparent, trackable supply chains
• Reduce admin burden with software automation

Take control of your CIS compliance and project financials with Planyard

Navigating the complexities of CIS doesn’t have to mean more admin or spreadsheet headaches. Planyard integrates seamlessly with HMRC-recognized accounting software like Xero, QuickBooks, and Sage—making it easy to stay compliant with CIS, MTD, and more. 

Whether you’re a subcontractor looking to streamline your CIS deductions and cash flow or, more importantly, a contractor managing multiple subcontractors, GPS applications, and monthly returns, Planyard has you covered. Contractors especially benefit from Planyard’s ability to automate CIS compliance, handle subcontractor verification, and manage tax deductions with ease. And when everything flows into Xero or QuickBooks Online, Planyard ensures your CIS data is fully synced—so CIS details are automatically handled in Xero, saving you time and reducing errors. Together, Planyard and Xero turn CIS from a compliance burden into a streamlined, strategic advantage.

Start your free 14-day trial today—no credit card needed. Or book a demo and see how easy CIS can be when your tools work together.