Construction Industry Scheme (CIS): A Complete Guide for Contractors

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of HMRC rules that apply to payments made by contractors to subcontractors in the construction industry. Under CIS, contractors must deduct a percentage from payments to subcontractors and pass those deductions to HMRC. The subcontractor then receives credit for these deductions against their own tax liability. The scheme is designed to reduce tax evasion in the construction sector, which has historically been a high-risk area for non-compliance.

Who Needs to Register?

Registration is mandatory for all contractors who pay subcontractors in the construction industry. A "contractor" in CIS terms includes construction companies, property developers, and any business that spends more than £3 million on construction in a 12-month period (even if construction is not their main activity — this catches organisations like housing associations, local authorities, and large retailers). Subcontractors do not have to register, but unregistered subcontractors face a higher deduction rate, so registration is strongly recommended.

As a subcontractor, you can register as a sole trader, a partnership, or a limited company. You need to provide HMRC with your business details, Unique Taxpayer Reference (UTR), and National Insurance number. Registration can be done online or by phone.

CIS Deduction Rates

There are three deduction rates under CIS:

• 20% — the standard rate for registered subcontractors. This is deducted from the labour element of the payment (materials are excluded).
• 30% — the higher rate for unregistered subcontractors. If a subcontractor has not registered with HMRC for CIS, the contractor must deduct 30% from their payments.
• 0% — for subcontractors with Gross Payment Status (GPS). These subcontractors receive their full payment with no deductions.

Deductions apply only to the labour element of the payment. If a subcontractor provides materials as part of the job, the cost of materials (supported by evidence such as invoices) is excluded from the deduction calculation. VAT is also excluded from the amount on which deductions are calculated.

Verification: Checking Your Subcontractors

Before making a payment to a subcontractor, contractors must verify them with HMRC. This is done online through HMRC's CIS verification service or through compatible payroll/CIS software. Verification confirms the subcontractor's registration status and the correct deduction rate to apply. You need the subcontractor's name, UTR, and either their NI number (for individuals) or company registration number (for limited companies). Verification must be carried out for each new subcontractor and should be repeated if there has been a gap in payments.

Monthly CIS Returns

Contractors must submit a monthly CIS return to HMRC by the 19th of each month following the tax month (which runs from the 6th of one month to the 5th of the next). The return details all payments made to subcontractors during the period, the deductions applied, and the subcontractor's verification details. Even if you have not made any payments to subcontractors in a particular month, you must still submit a nil return. Late returns attract a penalty of £100 per month for each month the return is late, up to a maximum of £3,000 for returns that are 12 months late.

CIS deductions must be paid to HMRC by the 22nd of each month if paying electronically (or the 19th if paying by cheque). These payments are made alongside your PAYE and NIC payments if you also run a payroll.

Gross Payment Status

Gross Payment Status (GPS) allows subcontractors to receive their full payment without any CIS deductions. This is a significant cash flow advantage, as you do not have to wait until the end of the year to reclaim your deductions. To qualify for GPS, you must meet three tests:

• Business test: You must carry on a business in the UK that includes construction work.
• Turnover test: Your net construction turnover must be at least £30,000 per year (for sole traders) or £30,000 per partner per year (for partnerships). For companies, the threshold is £30,000 per director.
• Compliance test: You must have a good compliance record with HMRC — no late tax returns, no late tax payments, and no outstanding tax debts.

HMRC reviews GPS status annually and can revoke it if you fail to meet the compliance test. Losing GPS can have a serious impact on your cash flow, so it is essential to keep your tax affairs in order.

CIS for Limited Companies

Limited companies operating as subcontractors in the construction industry can offset their CIS deductions against their PAYE, NIC, and CIS liabilities. If the deductions exceed these liabilities, the company can apply for a refund from HMRC or carry them forward. Since April 2014, companies have been able to claim CIS deductions suffered in real time through the EPS (Employer Payment Summary) process, which means quicker recovery of overpaid amounts.

Companies acting as both contractors and subcontractors (which is common in the construction sector) need to manage both sides of CIS carefully — deducting from payments to their subcontractors while tracking deductions suffered on their own income.

Common CIS Compliance Issues

HMRC actively polices CIS compliance and carries out regular reviews and inspections. Common issues include:

• Failing to verify subcontractors — This can result in applying the wrong deduction rate and potential penalties.
• Not submitting monthly returns on time — Even nil returns must be filed; late filing penalties accumulate quickly.
• Incorrect treatment of materials — Contractors must ensure that only genuine material costs are excluded from deduction calculations.
• Employment status issues — If HMRC determines that a person treated as a subcontractor is actually an employee, the contractor may face backdated PAYE and NIC liabilities, plus penalties and interest.
• Record-keeping failures — You must keep records of all CIS payments, deductions, and verification details for at least three years after the end of the tax year to which they relate.

How London Accountant Can Help

CIS compliance can be complex, particularly for businesses that act as both contractors and subcontractors. At London Accountant, we have extensive experience working with construction businesses across London. We handle CIS registration, monthly verification of subcontractors, preparation and submission of monthly CIS returns, year-end reconciliation and refund claims, and advice on employment status and Gross Payment Status applications. Our fixed-fee CIS packages give you certainty on costs and peace of mind that your compliance obligations are being met. Get in touch for a free initial consultation.