CIS,
explained.
Plain English.
The Construction Industry Scheme is the HMRC framework that governs how contractors pay subcontractors and how tax is deducted at source on labour. This page is a working reference — who is in scope, the deduction rates, the monthly returns, the reverse charge, and what happens when it goes wrong. Written for a UK SME.
What CIS is and why it exists.
The Construction Industry Scheme (CIS) is an HMRC scheme that requires contractors to deduct tax from payments made to subcontractors for construction work, and to pass those deductions to HMRC on the subcontractor's behalf. The scheme has been running, in some form, since 1972; the current version dates from 2007. It exists because UK construction historically had a high rate of labour-only working and cash payments, and HMRC needed a way to collect tax at source rather than chasing it after the fact.
CIS does not replace income tax or corporation tax — the deduction is a payment on account against the subcontractor's eventual tax bill. At year end, the subcontractor reconciles total CIS suffered against total tax due. A net subcontractor's deductions usually cover most or all of their final liability, with the balance (positive or negative) settled through self-assessment or company corporation tax.
Who CIS applies to.
CIS applies to two roles, and a single business is often both at the same time:
- Contractor — anyone who pays a subcontractor for construction work. The main contractor on a site is a contractor. So is a developer who hires a builder. So is a "deemed contractor" — a non-construction business whose construction spend exceeds a rolling threshold (currently £3 million in any 12-month period as of 6 April 2021).
- Subcontractor — anyone receiving payment for construction work. Sole traders, limited companies, partnerships and labour-only operatives are all subcontractors when they invoice another business for construction work.
If you build for the public — the householder commissions you to refurbish their home — that is not CIS. CIS is between businesses. The flow stops at the end client when the end client is a private domestic customer.
What counts as "construction operations".
CIS applies to construction operations as defined in section 74 of the Finance Act 2004. The list is broad: site preparation, demolition, building work, repairs, alterations, M&E, painting and decorating, internal cleaning of buildings done in the course of construction, and a long tail of related activities. It does not cover architecture, surveying, scaffolding hire (without labour), carpet fitting, the manufacture of materials, or construction-equipment hire on its own.
Mixed contracts cause most of the confusion. If a contract includes construction operations and other operations, and the construction element is not trivial, the whole contract is in scope. Get this wrong and HMRC will recover the deductions you should have made, plus penalties.
0% — gross payment status.
A subcontractor with gross status receives payments without any CIS deduction. The contractor still verifies them with HMRC and reports the payment on the monthly return, but no tax is taken at source. To qualify, the subcontractor must pass three tests — business test, turnover test (£30,000 minimum per partner or director, with a £100,000 threshold for companies as a whole) and compliance test (a clean record on tax returns and payments). Gross status is reviewed annually.
For larger subbies, gross status is the goal. Cash flow is much easier when 100% of every invoice lands in the bank account, and the year-end reconciliation is cleaner.
20% — registered net status.
The default for most subcontractors. Registered with HMRC for CIS, verified by the contractor, and 20% is deducted from the labour element of every payment. The deduction is a payment on account against the subcontractor's year-end tax bill.
30% — unmatched / unregistered.
When verification fails — the subcontractor is not registered, or the details given do not match HMRC's records — the contractor must deduct 30% from the labour element. This is the rate that hurts subcontractors most, and it is almost always avoidable by keeping CIS registration current and matching on UTR, name and National Insurance number.
Materials vs labour.
CIS is deducted only from the labour element of an invoice — not the cost of materials, plant hire or specific overheads. The split must be reasonable. HMRC accepts the actual cost of materials shown on supplier invoices, plus an uplift if the subbie is taking commercial risk on the procurement. Padding the materials line to reduce CIS is tax evasion, and HMRC look for it.
Verification.
Before a contractor pays a new subcontractor, they must verify the subbie with HMRC. Verification returns one of three results — gross, net, or unmatched — which sets the deduction rate. Verifications are done online via the HMRC CIS portal, by phone, or through CIS-compatible software (faster, audit-trailed). The verification ID and date must be retained.
Once a subcontractor has been verified and paid by you, they remain "active" for the current and following two tax years; you do not need to re-verify within that window unless their status changes. The exception is the first time you pay a new subbie — always verify.
The CIS300 monthly return.
The CIS300 is a monthly return covering all CIS payments made in the tax month (6th to 5th). It must be filed with HMRC by the 19th of the following month. Each line lists the subcontractor, the gross amount paid, the cost of materials, the labour element and the tax deducted.
A nil return is required if you are registered as a contractor but did not pay any subcontractors in the month. Forgetting to file a nil return is the most common preventable CIS penalty. The first £100 fine triggers at one day late and escalates from there.
Deduction certificates.
Within 14 days of the end of the tax month, the contractor must give every subcontractor paid that month a written statement (often called a "deduction certificate" or "PDS — Payment and Deduction Statement") showing the amounts paid, materials, labour, deduction and verification reference. The subcontractor uses these statements to reconcile CIS suffered at year end.
Year-end reconciliation.
At year end, a subcontractor adds up all CIS suffered and offsets it against their tax bill — through PAYE for limited companies (if registered as an employer), or through self-assessment for sole traders. If suffered CIS exceeds the tax due, HMRC refunds the difference. For limited companies waiting on a refund, cash flow can be tight until reconciliation completes.
Domestic Reverse Charge for construction VAT.
Since 1 March 2021, supplies of standard- and reduced- rated construction services between VAT-registered businesses in the CIS chain are subject to the Domestic Reverse Charge (DRC). Under DRC, the contractor receiving the service accounts for the VAT — the subcontractor does not charge it on their invoice.
In practice, the subcontractor's invoice shows zero VAT and notes "Reverse charge: customer to pay the VAT to HMRC" (or equivalent wording). The contractor then accounts for the same amount as both output VAT and (if they are entitled to reclaim) input VAT on their own VAT return. Cash neutral if you can fully recover input VAT; cash positive for the contractor; cash negative for the subcontractor (who used to receive VAT and pay it over a quarter later).
DRC does not apply to:
- Supplies to end users (the householder, the developer occupying their own building, the property owner) — they pay VAT in the normal way.
- Supplies to intermediary suppliers connected to the end user.
- Supplies that fall outside CIS construction operations — design fees, surveys, plant hire without an operator.
- Zero-rated supplies (new-build dwellings, for example).
An end user who is in the chain must give written notice to the supplier — failure to do so leaves the supplier having to apply DRC, and arguments about whether VAT should have been charged usually end up at HMRC.
Common CIS errors.
- Missed verification. Paying a new subbie before verifying. Default 30% deduction applies; HMRC look for the verification ID at audit.
- Late CIS300. Filed after the 19th. £100 first penalty, scaling with delay and prior offences.
- Wrong band. Continuing to deduct 20% after the subbie's gross status has been granted, or applying 0% to a subbie who has lost it.
- Materials over-stated. Padding the materials line to reduce the labour element. HMRC reviews invoices and recovers under-deducted CIS plus penalties.
- Reverse charge missed. Subbie still charging VAT on labour to a contractor inside the CIS chain after 1 March 2021. Both sides have to correct.
- Statements late. Deduction certificates issued more than 14 days after the tax month end. Subbies cannot reconcile, and penalties apply.
Penalties.
Late CIS300 filing starts at £100 (1 day late), rises to £200 (2 months), £300 or 5% of CIS due at 6 months, and another £300 or 5% at 12 months. Persistent failure attracts higher daily penalties. Incorrect returns can attract penalties of up to 100% of the tax difference under the careless / deliberate framework.
For gross-status subcontractors, the harshest penalty is losing gross status — failure to file or pay within tolerance can result in a refusal or revocation, which moves the subbie to 20% on every invoice for at least a year. For larger subbies that is an immediate cash-flow event of meaningful size.
The CIS work
does itself.
Verification, deduction calculation, return, certificate and reverse-charge handling are baked into the platform. You set up the subbie once, the platform does the rest.
Live UTR check
Onboard a subbie, the platform calls HMRC, verification ID and band returned in seconds. No portal, no phone call, no copying numbers.
Cuts15 min → 30 secBands auto-applied
0/20/30% applied per AfP based on the verified band. Materials vs labour split logged with the line. Invoice approved, deduction calculated, certificate queued.
Tax0/20/30%CIS300 by the 5th
Monthly return assembled automatically. Reviewed on the 5th, filed by the 19th. Nil returns auto-flagged. Audit trail signed and retained.
FilingBy 19thCertificates auto-issued
Deduction certificates emailed to subbies within 14 days of the tax month, signed PDF, archived against the subbie record. No manual chasing.
Window14 daysReverse charge handled
Each subbie record carries the reverse-charge flag. Invoices generated under DRC or normal VAT depending on the contract. Wording on the invoice matches HMRC requirements.
Since01 Mar 2021Audit trail unfakeable
Every verification, deduction, certificate and return signed and append-only. The chain of custody an HMRC inspector accepts on the first walkthrough.
Modeappend-only