CIS guide for builders
CIS: how the scheme works, and how it changes your quoting
The Construction Industry Scheme takes tax off a subcontractor before the money reaches their bank account. Once you know how the deduction is calculated, you can quote and plan cashflow around it instead of being caught out by it.
Short answer
The Construction Industry Scheme requires a contractor to deduct tax from a subcontractor's payments and send it to HMRC before the subcontractor is paid. The deduction is 20% for registered subcontractors, 30% for unregistered ones, and 0% for subcontractors with gross payment status, and it applies to labour only, never to the cost of materials. For quoting, the practical effect is cashflow: plan around 20% to 30% of every labour payment being withheld until it credits against the subcontractor's tax bill at Self Assessment.
Quick check
- Work out whether you are a contractor, a subcontractor, or both
- Register for CIS before your first payment is due
- Verify every subcontractor with HMRC before paying them
- Split labour and materials clearly on every invoice
- Apply 20%, 30% or 0% to the labour element only
- File the monthly return by the 19th, even in a nil month
- Give subcontractors a payment and deduction statement within 14 days
- Plan cashflow around 20% to 30% of labour payments being withheld
1. Who CIS applies to
CIS covers most construction work on permanent or temporary buildings, structures and civil engineering carried out in the UK.
| Role | What it means |
|---|---|
| Contractor | Pays subcontractors for construction work, or is a "deemed contractor": a non-construction business that has spent more than £3 million on construction in the 12 months since its first payment. |
| Subcontractor | Carries out construction work for a contractor and is paid under CIS deduction rules. |
| Both | Many builders are a contractor on one job, hiring a specialist trade, and a subcontractor on another, working for a main contractor or developer. |
Deemed contractor status can creep up on a client
If a client that normally only commissions private work takes on a large enough construction spend, for example a housing association or retailer, check whether they now fall inside CIS as a deemed contractor. If they do, they should be verifying and deducting from you.
2. Registering and verifying subcontractors
Contractors must register for CIS before taking on subcontractors. Before paying a subcontractor for the first time, a contractor must verify them with HMRC to find out which deduction rate applies.
- Register as a contractor before your first subcontractor payment
- Verify each new subcontractor with HMRC before you pay them
- Re-verify a subcontractor you have not paid for over two years
- Keep the verification reference with your CIS records
3. The three deduction rates
The rate is set by HMRC when the contractor verifies the subcontractor. Neither side chooses it on the day.
| Status | Rate | Who it applies to |
|---|---|---|
| Registered | 20% | Subcontractors verified and registered with HMRC for CIS. |
| Unregistered | 30% | Subcontractors who have not registered for CIS. |
| Gross payment status | 0% | Subcontractors HMRC has approved to be paid in full, with no deduction at source. |
4. What the deduction is actually taken from
CIS deductions apply to the labour element of a payment only. VAT, the direct cost of materials the subcontractor paid for, consumable stores, fuel used other than for travelling, and plant hire are all left out of the calculation before the percentage is applied.
The materials figure is the cost the subcontractor actually paid, not a marked-up resale price, and HMRC expects it to be evidenced with receipts if asked.
Worked example
Splitting an invoice correctly
A subcontractor invoices £5,000 for a job made up of £3,500 labour and £1,500 materials bought directly for that job. A 20% deduction applies only to the £3,500 labour, so £700 is deducted and £4,300 is paid. If the invoice had shown one combined figure of £5,000, the contractor would have had to deduct 20% of the whole amount: £1,000, not £700.
A combined figure costs you money now, not later
The £300 difference in the example above is not lost forever, it is recovered when the subcontractor files their Self Assessment return. But it sits with HMRC rather than in the subcontractor's bank account until then, which is exactly the cashflow problem worth avoiding.
5. The monthly cycle contractors run
- 1
Verify
Check new subcontractors with HMRC before the first payment.
- 2
Deduct and pay
Take the correct percentage off the labour element and pay it to HMRC.
- 3
File the return
Submit the monthly CIS return by the 19th of the month following the tax month, even in a month with no payments.
- 4
Give the statement
Provide each subcontractor a payment and deduction statement within 14 days of the end of the tax month.
Late returns are penalised quickly
A return one day late carries a £100 penalty, rising to £200 after two months and to 5% of the CIS deductions, or £300, whichever is higher, after six and again after twelve months. Filing a nil return costs nothing; missing the deadline does.
6. Gross payment status as a business milestone
Gross payment status lets a subcontractor be paid in full, with no deduction, and settle everything through Self Assessment or Corporation Tax instead. HMRC checks three things before granting it.
- Turnover test: at least £30,000 a year for a sole trader, or £30,000 per partner or director, with £100,000 for the whole partnership or company
- Compliance test: tax and National Insurance paid on time in the past
- Business test: construction work carried out in the UK, run through a business bank account
7. How CIS should change your quoting
CIS is not a cost to build into the price, it is a cashflow timing issue. The work costs what it costs; the deduction only changes when the money reaches your account.
Quote and invoice with labour and materials shown as separate figures on every job where CIS applies. That single habit keeps the materials element out of the deduction and gives you a clean number to check against what actually lands in the bank.
Because 20% to 30% of every labour payment can be withheld until it credits at Self Assessment, plan cashflow around it: keep a buffer for supplier and wage bills that fall due before a CIS-deducted payment clears, and check what you will actually receive before agreeing a price with a contractor.
8. How the deduction comes back to you
CIS deductions are not a separate tax, they are an advance payment. A sole trader subcontractor declares the full invoice value as income and enters the CIS deductions taken in the CIS deductions field of their Self Assessment return. HMRC sets those deductions against the income tax and Class 4 National Insurance due, and pays back anything left over. Our guides to Self Assessment and CIS refunds cover what that means for your bill and how the repayment is claimed.
Common questions
Do I have to register for CIS?
If you are a subcontractor, registration is optional but the deduction rate rises to 30% if you do not register, against 20% if you do. If you are a contractor paying subcontractors, or a business that has spent over £3 million on construction in 12 months, registration is required.
What is the CIS deduction rate?
20% for registered subcontractors, 30% for unregistered ones, and 0% for subcontractors HMRC has approved for gross payment status.
Does CIS apply to materials?
No. The deduction applies to labour only. VAT, the direct cost of materials the subcontractor paid for, plant hire and consumable stores are left out before the percentage is applied, provided they are shown separately on the invoice.
How do I get gross payment status?
Apply to HMRC once you pass the turnover, compliance and business tests. It removes the deduction entirely and settles your CIS position through Self Assessment or Corporation Tax instead.
What happens if a contractor does not verify a subcontractor?
HMRC can require the higher 30% rate, and the contractor risks penalties for getting the deduction wrong. Verification before the first payment is a contractor's duty, not optional admin.
Sources and further reading
Primary and authoritative sources used to check this guide.
- What is the Construction Industry Scheme (CIS)?GOV.UK
- What you must do as a CIS contractorGOV.UK
- File your monthly CIS returnsGOV.UK
- Make deductions and pay subcontractorsGOV.UK
- What you must do as a CIS subcontractorGOV.UK
- Gross payment statusGOV.UK
- CIS guide for contractors and subcontractors (CIS340)HM Revenue & Customs
General information for UK building businesses, not tax advice. CIS registration, verification and deduction rates depend on your specific circumstances and HMRC's current rules. Confirm your position with HMRC or an accountant before you rely on it.