# What is the Construction Industry Scheme (CIS)?

Last updated: 12 February 2026
Category: Contractors

**Quick answer:** CIS is a tax deduction scheme where contractors deduct tax from payments to subcontractors. Standard deduction is 20%, or 30% for unregistered subcontractors. Some get 0% (gross payment status).

## Detailed explanation

**Construction Industry Scheme (CIS)**:

**Who it applies to**:
- Contractors paying for construction work
- Subcontractors receiving payments for construction work
- Includes: building, repairs, decorating, demolition, civil engineering

**Contractor obligations**:
- Register as a contractor with HMRC
- Verify subcontractors before paying
- Deduct tax from payments (labour element)
- File monthly CIS returns
- Keep records for 3 years

**Deduction rates**:
- 20%: Registered subcontractors
- 30%: Unregistered subcontractors
- 0%: Gross payment status (strict criteria)

**Gross payment status requirements**:
- Pass compliance test (filed returns, paid tax)
- Pass turnover test (£30,000+ for sole traders)
- Pass business test (in construction for 3+ years or directors with experience)

**What's deducted**:
- Tax on labour costs only
- Materials cost is paid gross
- Must show materials separately on invoices

**Subcontractor recovery**:
- CIS deductions count as tax paid
- Set against Corporation Tax or PAYE liability
- Claim refund if overpaid

**Common mistakes**:
- Not verifying subcontractors
- Deducting from materials
- Late CIS returns (£100 penalty per month)
- Miscategorizing employees as subcontractors

**Filing**:
- Monthly returns by 19th (22nd if online)
- Include all payments to subcontractors
- Nil returns required if no payments made

Source: HMRC Construction Industry Scheme

## Real-world examples

### Plumbing Subcontractor

Sarah runs a plumbing business as a limited company and is subcontracted by a larger construction firm. As a registered subcontractor, the construction firm deducts 20% CIS tax from Sarah's invoices, covering the labour element, before paying her the remaining balance.

### Property Developer as Contractor

ABC Developers Ltd. hires various subcontractors (electricians, carpenters, bricklayers) for a new housing development. ABC Developers must register as a contractor, verify each subcontractor's CIS status with HMRC, and deduct the correct CIS tax before making payments.

### Landscaper with Gross Payment Status

John's landscaping company meets HMRC's criteria for Gross Payment Status. He's subcontracted for a large commercial development. Because of his GPS, the main contractor doesn't deduct any CIS tax from his invoices, and John handles his tax obligations directly with HMRC.

## Common mistakes to avoid

- Failing to register as a contractor when obligated, resulting in penalties from HMRC.
- Incorrectly classifying materials vs. labour on invoices, leading to inaccurate CIS deductions.
- Not verifying a subcontractor's CIS registration status before payment and assuming a 20% deduction is always correct.
- Neglecting to keep accurate records of CIS payments and deductions for at least three years, hindering accurate reporting to HMRC.

## Frequently asked questions

### What qualifies as 'construction work' under the CIS?

Construction work is broadly defined and includes activities like building, alterations, repairs, demolition, and even painting and decorating. HMRC provides a detailed list of included and excluded activities in their CIS guidance notes.

### How does CIS affect my VAT obligations?

CIS deductions are made *before* VAT is added to the invoice. You still need to charge VAT on the full invoice amount and account for it separately in your VAT returns, regardless of CIS deductions.

### What happens if I'm both a contractor and a subcontractor?

If your company operates as both, you must fulfill both the contractor and subcontractor obligations under CIS. You'll deduct CIS from your subcontractors and have CIS deducted from your payments as a subcontractor.

### How do I apply for Gross Payment Status?

You can apply for Gross Payment Status through HMRC's online services. You'll need to meet certain criteria, including a good tax payment history and a proven record of compliance with CIS regulations.

## Practical tips

- Use accounting software that integrates with CIS to automate subcontractor verification and CIS return preparation.
- Create a template invoice clearly separating labour and materials costs to ensure accurate CIS deductions.
- Implement a system for regularly checking subcontractor CIS registration status to avoid over or under-deducting CIS tax.
- Set calendar reminders for monthly CIS return deadlines to avoid late filing penalties from HMRC. The deadline is the 19th of each month for the previous tax month.