CIS tax is the deduction a contractor takes from a subcontractor's pay under the Construction Industry Scheme — 20% if the subcontractor is registered with HMRC, 30% if they are not, and 0% for those who qualify for gross payment status. The deduction is not an extra tax. It is an advance payment of the subcontractor's income tax and National Insurance, set off against their bill at the end of the year.
Simple enough on paper. In practice, CIS trips up more construction businesses than almost any other part of the tax system, because the scheme puts the compliance burden on the payer, polices it with automatic monthly penalties, and sits right next to a VAT reverse charge that works in a completely different way.
This guide covers how the deductions work, who has to operate the scheme, how to get paid gross, and where the money comes back.
How the CIS deduction actually works
Before applying the 20% or 30% rate, the contractor starts with the gross payment and subtracts VAT plus the specific costs HMRC allows — not every non-labour charge, and never a materials mark-up. Under HMRC's rules, the deduction is calculated after removing:
- VAT charged by the subcontractor
- materials the subcontractor paid for directly, including their delivery cost
- consumable stores and fuel used on the job (though not fuel for travelling)
- plant and equipment hired for the work
- the cost of manufacturing or prefabricating materials
So a registered subcontractor invoicing £5,000, of which £2,000 is materials with receipts, suffers a deduction of 20% on £3,000 — £600, not £1,000. Contractors are entitled to ask for evidence of material costs and must make a fair estimate if none is provided. Getting this split wrong in the subcontractor's favour is the contractor's liability, which is why sloppy invoices cause so many disputes.
The contractor pays the deducted amounts to HMRC monthly, alongside PAYE, and gives the subcontractor a payment and deduction statement within 14 days of the end of each tax month. Those statements are the subcontractor's proof of tax already paid — lose them and reclaiming becomes painful.
Who has to register
A contractor is any business that pays subcontractors for construction work — and that includes businesses outside construction. A retailer, landlord or manufacturer becomes a deemed contractor once it spends more than £3 million on construction operations within any rolling 12-month period, and must then operate CIS on further payments.
Subcontractors are not legally required to register, but the incentive is blunt: unregistered subcontractors lose 30% of their labour value at source instead of 20%. For a sole trader on £40,000 of labour a year, that is £4,000 of extra cash flow handed to HMRC until the annual return catches up.
Construction work is defined broadly — site preparation, demolition, building, alterations, repairs, decorating, and installing systems such as heating and lighting. Professional-only services sit outside the scheme: architects, surveyors, and consultants delivering nothing but design or advice are not caught.
Gross payment status: getting paid without deductions
Gross payment status (GPS) is the prize for established subcontractors. Qualify and contractors pay you in full; you settle your own tax through your return like any other business. Cash flow improves overnight, and main contractors tend to treat GPS as a mark of a serious outfit.
The tests are threefold:
- Turnover — labour turnover, net of VAT and materials, of at least £30,000 for a sole trader. Partnerships need £30,000 per partner or £100,000 for the whole partnership; companies £30,000 per director or £100,000 for the company (companies controlled by five or fewer people need £30,000 per person).
- Compliance — tax returns filed and tax paid on time in the qualifying period. Since 6 April 2024, VAT compliance is part of this test too: HMRC can refuse or cancel GPS for VAT failures, with only modest tolerances (up to three VAT returns filed no more than 28 days late, or late-paid VAT under £100 settled within 14 days).
- Business — construction work carried out in the UK, run through a business bank account.
HMRC reviews GPS holders on an ongoing basis, and losing the status mid-contract is disruptive — contractors must switch back to deducting, and some will quietly re-tender the work. If a VAT return slips or a payment plan is needed, deal with it before it costs the status.
Monthly returns and the penalty ladder
Contractors file a CIS return every month, due by the 19th following the end of the tax month — the return for 6 May to 5 June is due by 19 June. Nil returns are still returns — though a contractor expecting a quiet spell can tell HMRC it will be inactive and pause the filing obligation for up to six months instead. The penalties stack automatically:
- £100 the day after the deadline
- a further £200 at two months
- £300 or 5% of the deductions on the return (whichever is higher) at six months, and again at twelve
- beyond twelve months, up to £3,000 or 100% of the deductions in serious cases
A contractor running three months behind across a handful of returns can build a four-figure penalty bill without HMRC lifting a finger. Appeals go in within 30 days, and a reasonable-excuse argument occasionally lands — but the reliable fix is a payroll process that files on time every month, which is exactly the sort of thing worth handing to a CIS payroll service.
Getting the deductions back
For sole traders and partners, CIS deductions feed into the self assessment return: they come off the final income tax and Class 4 NIC bill, and anything left over is refunded after filing. File in April rather than January and the refund arrives months earlier — CIS subcontractors are one of the few groups who routinely have money waiting for them.
Limited companies work differently. During the year, the company reports its CIS deductions on its Employer Payment Summary and offsets them against PAYE liabilities. Any surplus left after 5 April is recovered through a separate repayment claim to HMRC once the tax year has ended — the final EPS alone is not the claim. HMRC will first set the money against any outstanding PAYE or corporation tax, and only pays out once all FPS and EPS filings are in and the deductions match the contractor statements — so companies with incomplete paperwork wait the longest.
CIS and the VAT reverse charge are different things
Since March 2021 most standard and reduced-rated construction services between VAT-registered businesses, where the payment is reported under CIS, fall under the domestic reverse charge: the subcontractor invoices without VAT and the customer accounts for it instead. End users who notify their supplier in writing are invoiced normally.
The two regimes get conflated constantly. CIS takes a slice of the labour charge as advance income tax; the reverse charge moves the VAT accounting to the customer. A subcontractor can be paid gross for CIS purposes and still have to issue reverse-charge invoices — one has nothing to do with the other, and each has its own penalty regime for getting it wrong.
What changed in April 2026: umbrella company liability
From 6 April 2026, recruitment agencies — or the end client where there is no agency — are jointly and severally liable for PAYE and NIC that an umbrella company in their labour supply chain fails to pay over, with no reasonable-care defence. CIS subcontractors themselves are unaffected, but construction businesses using mixed supply chains of CIS subcontractors and umbrella-employed workers now carry real exposure on the umbrella side. If agency workers are on your sites, it is worth knowing exactly who employs them and checking that the umbrella's PAYE actually reaches HMRC.
Where advice earns its keep
Most CIS pain is process pain: registrations done late, materials splits unevidenced, returns missed, refunds left unclaimed for months. A specialist who runs CIS schemes daily fixes those quickly. The harder questions — whether GPS is within reach, how a company should structure its offsets, whether a deemed-contractor obligation has quietly crystallised — reward proper advice before HMRC asks first.
Acumon runs CIS registration, verification, monthly returns and reclaims for contractors and subcontractors across the UK — see our CIS services, or the sector pages for construction businesses and contractors.