CIS for Construction Businesses: A Plain-English Guide

If you run a construction business and pay other tradespeople to work for you, there's a tax scheme you can't afford to get wrong. The Construction Industry Scheme (CIS) is HMRC's way of collecting tax from subcontractors at source: instead of paying a subcontractor in full and leaving them to settle their tax later, you deduct a slice from each payment and send it straight to HMRC. Get it right and it's just another monthly routine. Get it wrong and you face penalties and a bill for deductions you should have made.

Whether you're the contractor paying or the subcontractor being paid, here's how it works in plain English.

Who does CIS apply to?

CIS covers most construction work in the UK: building, repairs, alterations, demolition, and installing systems like plumbing, electrics and air conditioning. If you're a contractor — a business that pays subcontractors for construction work — you must register, verify your subcontractors with HMRC, deduct tax where required, and file a monthly return.

If you're a subcontractor — a sole trader, partnership or limited company doing construction work for a contractor — register for CIS too. Registration is what gets you the lower 20% deduction rate instead of 30%. And some businesses that don't think of themselves as construction firms get caught as well: a business that spends heavily on construction work, for example a property developer, can count as a "deemed contractor" and fall under the same rules.

The three deduction rates

When you pay a subcontractor, HMRC tells you which rate to use after you verify them:

• 20% — the standard rate, for subcontractors who are registered for CIS and verified.
• 30% — the higher rate, for subcontractors who aren't registered or can't be verified.
• 0% — no deduction, for subcontractors with gross payment status.

Gross payment status is worth knowing about: established subcontractors who meet HMRC's turnover and compliance tests can apply to be paid in full, with no deductions at all. If you've been trading steadily and your tax affairs are in order, it's well worth applying — it transforms your cash flow.

Example: a bricklayer invoices £1,000 for labour. Verified and registered, you deduct £200, pay £800, and send £200 to HMRC. Unverified, you deduct £300 and pay £700. That £100 gap is exactly why registration matters.

What CIS deductions don't apply to

This is where many contractors trip up: deductions apply to labour only. You do not deduct from materials the subcontractor paid for, VAT, plant hire, fuel for plant, or off-site manufacturing. So split each invoice into labour and everything else first, and deduct from the labour portion only.

Ask your subcontractors for evidence of their materials costs — receipts or invoices — so the split is based on real figures rather than a guess. If there's no evidence, you'll have to estimate, and understating materials means over-deducting from someone's wages. That's the kind of mistake that damages working relationships fast.

Your monthly CIS routine

CIS runs on a monthly cycle, and the easiest way to stay compliant is to treat it as a fixed routine.

Verify before you pay

Before paying a new subcontractor, verify them with HMRC — through the free CIS online service or your accounting software. You'll need your own UTR, accounts office reference and employer reference, plus the subcontractor's UTR and National Insurance number (or company registration number for a limited company). If you've already included a subcontractor on a return in the current or previous two tax years, you don't need to verify them again.

File the return by the 19th

Every month, file a CIS return showing who you paid and what you deducted. The deadline is the 19th of the month after you paid — so October payments go on a return due by 19 November. Pay the deductions to HMRC by the same date, or by the 22nd if you pay electronically. And don't skip a month just because you paid nobody: tell HMRC you're inactive for that period instead of leaving a gap.

Give subcontractors their statements

Within 14 days of the end of each tax month, give every subcontractor you deducted from a payment and deduction statement showing the gross amount, the rate, and the total deducted. They need it to reconcile their own tax.

The mistakes that trigger penalties

Most CIS penalties aren't about deliberate avoidance — they're about sloppy routine. Late returns attract a fixed £100 penalty, with more to follow the longer the return stays unfiled. Deducting from materials, using the 20% rate without verifying first, and forgetting deduction statements are the other classics. Keep your CIS records for at least three years from the end of the tax year they relate to, so you can answer any HMRC question with evidence rather than memory.

One more check: if you're a self-employed subcontractor with qualifying income over £50,000, Making Tax Digital for Income Tax already applies to you, and your CIS deductions now flow through your quarterly updates and final return. Your contractor's monthly CIS return hasn't changed — but how you reclaim the deductions has.

What to do this week

If CIS is new to you, start here: register with HMRC, verify anyone you're about to pay, and set a recurring reminder for the 19th of every month. If you've been running CIS for a while, audit your last three returns — check that materials were excluded, every subcontractor was verified, and every statement went out. One afternoon of checking now beats a penalty letter later.

And if the monthly cycle is eating time you'd rather spend on site, that's where we come in. Our bookkeeping services include CIS returns, subcontractor verification and deduction statements handled for you, so the 19th never creeps up on you. Get in touch for a chat about your construction business, and browse our blog for more plain-English tax guidance. GOV.UK's official Construction Industry Scheme guide (CIS 340) is also worth bookmarking.