The Construction Industry Scheme (CIS) shapes how UK contractors and subcontractors get paid and taxed. This guide from MIST Accounting breaks down who it applies to, how deductions work, and the compliance steps you need to stay penalty-free.

The Construction Industry Scheme (CIS) is one of the most important compliance requirements for contractors and subcontractors in the UK construction sector. It governs how payments are made, how tax is deducted, and how these deductions are reported to HMRC.

This blog unpacks CIS in detail — from who it applies to, how deductions are calculated, to common scenarios with practical examples.

🔎 What is CIS?

The Construction Industry Scheme (CIS) is a tax deduction system in which tax is deducted at source from payments related to construction work.

• CIS applies to payments made to subcontractors, not employees (employees fall under the PAYE system).

• Contractors deduct tax from subcontractor payments and pass it on to HM Revenue and Customs (HMRC).

This ensures that taxes are collected consistently in a high-risk industry where temporary and contract-based work is common.

👷 Who is a Contractor?

A contractor is any business that pays subcontractors for construction work. Under CIS, there are two categories:

1. Mainstream contractors – Businesses whose primary operations involve construction activities (e.g., builders, developers).

2. Deemed contractors – Businesses not in construction but spending over £3 million on construction in a year (e.g., local authorities, housing associations).

Note: Private householders are not considered contractors and are outside CIS.

🛠️ Who is a Subcontractor?

A subcontractor is an individual or company hired to carry out construction work for a contractor.
They may:

• Perform the work directly, or

• Employ others (staff or subcontractors) to carry it out.

  
  

🔄 How the Arrangement Works

1. Contractor provides contract → subcontractor completes the work.

2. The subcontractor raises an invoice.

3. The contractor makes a payment after deducting CIS tax.

4. Deducted tax is passed to HMRC.

📌 Key Terms:

• CIS Deduction (Contractor’s books): Tax deducted from subcontractor’s invoice.

• CIS Suffered (Subcontractor’s books): Tax withheld by contractor, recorded as advance tax paid.

🏗️ Work Covered by CIS

CIS applies to:

• Site preparation (demolition, groundwork)

• Building, repairs, and decorating

• Installation of systems (heating, lighting, etc.)

• Alterations or dismantling

CIS does not apply to:

• Professional services (architects, surveyors)

• Material delivery

• Scaffolding hire (without labor)

📑 Registration and Deduction Rates

Both contractors and subcontractors must register under CIS.

• Standard deduction: 20% (for registered subcontractors)

• Higher deduction: 30% (if subcontractor not registered)

• Gross payment status: Some subcontractors can apply to be paid gross, without deduction.

💷 How Contractors Calculate Deductions

Contractors exclude the following when calculating the deduction base:

• Materials

• Consumables

• Fuel (except for travel)

• Plant hire costs

• Prefabrication costs

Two Scenarios:

1. Subcontractor VAT-registered → Deduction is on net invoice (excluding VAT & excluded costs).

2. Subcontractor not VAT-registered → Deduction includes VAT, minus excluded costs.

📊 Practical Examples

Example 1: CIS-registered subcontractor

• Invoice: £200 for labor

• Deduction @20% = £40

• Net payment = £160

Example 2: Non-registered subcontractor

• Invoice: £200 for labor

• Deduction @30% = £60

• Net payment = £140

Example 3: Subcontractor supplies materials (not VAT-registered)

• Invoice: £595 (Labour £300 + Materials £235 + Expenses £60)

• Deduction base = £360

• Deduction @20% = £72

• Net payment = £523

Example 4: VAT-registered subcontractor

• Invoice: £840 (£700 + VAT £140)

• Deduction base = £500 (excluding materials + VAT)

• Deduction @20% = £100

• Net payment = £740

🏢 CIS for Limited Companies (Subcontractors)

Subcontractors that are limited companies can offset CIS suffered against:

• PAYE tax

• Employer & employee NICs

• CIS deducted from other subcontractors

If excess CIS remains after offsetting, it can be:

• Refunded at year-end, or

• Set against Corporation Tax liabilities.

📝 Reporting & Compliance

Contractors must:

• Provide subcontractors with a CIS deduction statement by the 19th of each tax month.

• File monthly returns to HMRC within 14 days of month-end.

• Pay deductions monthly (or quarterly if payments < £1,500).

Subcontractors must:

• Report CIS suffered in Self-Assessment (SA103 for individuals, SA800 for partnerships).

• Claim offsets/refunds through payroll or Self-Assessment.

⚠️ Penalties for Non-Compliance

• Late monthly return filing → Automatic penalties from HMRC.

• Incorrect reporting → Risk of fines and interest charges.

• Persistent non-compliance → May lose gross payment status.

✅ Conclusion

The Construction Industry Scheme (CIS) ensures tax compliance in a sector prone to cash transactions and sub-contracting. While it may feel complex, understanding the roles of contractors and subcontractors, knowing what is covered, and calculating deductions correctly can prevent costly mistakes.

Key takeaway: Proper CIS compliance = fewer penalties, smoother cash flow, and a trustworthy reputation with HMRC.