How the Construction Industry Scheme works

The Construction Industry Scheme (CIS) makes a business that pays subcontractors for construction work take tax off those payments and pass it to HMRC. The deduction is 20% for a registered subcontractor, 30% for one who is unregistered or cannot be verified, and nothing for one with gross payment status. What is deducted counts as an advance payment of the subcontractor’s own tax: a sole trader claims it on the Self Assessment return, and a company sets it against its payroll liabilities.

Who counts as a contractor?

Chapter 3 of Part 3 of the Finance Act 2004 sets up the scheme. HMRC’s Construction Industry Scheme Reform Manual (CISR12020) explains that there are three routes into being a contractor:

Mainstream contractors (section 59(1)(a)): businesses that carry out construction work or supply labour for it, including builders, property developers and gang leaders. They must operate CIS whatever they spend.
Subcontractors who subcontract (section 57(2)): a registered subcontractor that passes part of its work down the chain is a contractor for that part.
Deemed contractors: businesses outside construction whose spending on construction is more than £3 million in the 12 months since their first payment, such as housing associations and local authorities. See CIS deemed contractors.

Householders having work done on their own homes are not contractors (CISR12030). GOV.UK lists exceptions, including work paid for by a charity or trust and work paid for by the governing body or head teacher of a maintained school on behalf of the local education authority. Labour agencies are usually outside CIS because the agency rules require them to operate PAYE, and where the off payroll working rules create a deemed employment those rules take priority over CIS (section 60(3A), CISR12040).

Who counts as a subcontractor?

Section 58 defines a subcontractor as a party who, under a construction contract, must carry out the work, provide their own or others’ labour for it, or is answerable for it being done by others. CISR13020 confirms this covers sole traders, partnerships and companies, labour agencies, foreign businesses working in the UK, and gang leaders who are paid for a gang’s work. Many businesses are both: subcontractor to the firm above and contractor to the firms below.

Employees are outside the scheme. Before paying anyone through CIS the contractor must check whether the worker should be an employee, and every monthly return includes a declaration that the subcontractors listed are not employees. GOV.UK warns of a penalty of up to £3,000 for giving the wrong employment status on a return. Employment status tests explains how that judgement is made.

What work is covered?

GOV.UK says CIS covers most construction work to buildings, including site preparation, decorating and refurbishment. It lists work that is not covered, including architecture and surveying, scaffolding hire with no labour, carpet fitting, delivering materials, and work on sites that is clearly not construction, such as running a canteen. The detailed definition of construction operations is in section 74.

How is the deduction worked out?

Section 61(1) requires the contractor to deduct the relevant percentage from the part of each payment that does not represent the subcontractor’s direct cost of materials. In practice GOV.UK tells contractors to start with the gross invoice and take off VAT, consumable stores, fuel (except for travelling), plant hired for the job, manufacturing or prefabricating materials and materials the subcontractor paid for directly. The rate HMRC gave on verification is then applied to what remains. If the subcontractor cannot show the cost of materials, the contractor estimates it (CISR15060). The rate rules are covered in CIS deduction rates explained.

How do deductions get from the contractor to HMRC?

A contractor registers through the process for a new employer and is given a PAYE reference; if it already has staff, its PAYE scheme becomes a combined PAYE and CIS scheme. Each month it must:

Verify any new subcontractor before the first payment; see how to verify a CIS subcontractor.
Give a payment and deduction statement to each subcontractor it has deducted from, within 14 days of the end of the tax month. For the tax month 6 May to 5 June that means by 19 June.
File the monthly return listing every subcontractor paid, gross or net, by the 19th. If nothing was paid, it files a nil return or asks for the scheme to be treated as inactive for up to six months.
Pay the deductions by the 22nd if paying electronically, or the 19th by post, together with any PAYE. Under regulation 8 of SI 2005/2045 a contractor whose PAYE and CIS payments average less than £1,500 a month may pay quarterly.

Late monthly returns attract automatic penalties: £100 at one day late, £200 at two months, and the greater of £300 or 5% of the deductions on the return at six months and again at 12 months, with up to £3,000 or 100% of the deductions possible after that. Records of gross payments, materials and deductions must be kept for at least three years after the end of the tax year.

How do the deductions reach the subcontractor’s tax account?

Section 62 sets out what a deduction becomes once paid to HMRC.

Sole traders and partners: the deduction is treated as Income Tax paid on the profits of the trade, and any excess as Class 4 National Insurance (section 62(2)). The return shows total pay before deductions as income and the total deductions separately. HMRC sets them against the bill and pays any balance back. When the return is processed HMRC automatically compares the deductions claimed with what contractors reported on their monthly returns (CISR75020).
Companies: the deduction is applied against the company’s own liabilities as an employer or contractor (section 62(3)). In practice the company reports its CIS deductions on its Employer Payment Summary and pays less PAYE, carrying any surplus forward within the same tax year and claiming a refund after the year ends. GOV.UK warns that using the Corporation Tax return instead can lead to a penalty. See reclaiming CIS deductions as a limited company.

Only deductions actually made can be credited. If a contractor pays gross when it should have deducted, the subcontractor gets no credit for the tax that should have been taken (CISR72070).

What does it look like in practice?

Illustration only. A plasterer, registered for CIS and not VAT registered, invoices a builder £3,000, of which £800 is plaster and beads she bought for the job.

Step	Amount
Gross invoice	£3,000
Less materials	£800
Amount subject to deduction	£2,200
Deduction at 20%	£440
Paid to the plasterer	£2,560

The builder includes the payment on its monthly return, pays the £440 to HMRC with its PAYE and gives her a statement. At the end of the year she enters £3,000 as income and £440 as CIS deductions on her return. Where the subcontractor is VAT registered, the domestic reverse charge usually applies to the VAT as well.

What changed from 6 April 2026?

The Finance Act 2026 added section 62A. Where a person makes a payment under a construction contract and, before paying, knew or should have known that a connected party in the same contract chain had deliberately failed, or would deliberately fail, to deduct or pay over CIS or PAYE, HMRC can make that person liable for an amount equal to 20% of the payment. It also amended section 66 so that gross payment status can be cancelled with immediate effect in those cases, with a five year bar on reapplying. Further detail is on the gross payment status page.

Where do businesses go wrong?

Paying a new subcontractor before verifying, then deducting at the wrong rate.
Taking the deduction from the whole invoice instead of excluding materials and VAT.
Not issuing payment and deduction statements, which subcontractors need to claim credit.
Forgetting nil returns in quiet months and collecting automatic penalties.
A company claiming its deductions on the Corporation Tax return instead of through payroll.

For a shorter overview, see the Construction Industry Scheme.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.