Construction Industry Scheme (CIS): A Contractor’s Guide

• The Construction Industry Scheme (CIS) is a special tax scheme that requires contractors to make certain deductions from subcontractors’ payments and pass them to HMRC.
• Contractors must register for the CIS.
• Subcontractors can choose not to register, but then the CIS deduction rate is 30% instead of 20% for registered subcontractors.
• Contractors have duties under CIS to verify subcontractors, make correct deductions, pay HMRC, file returns, keep records and inform HMRC of any changes.

The Construction Industry Scheme (CIS) is a set of rules for how contractors must handle payments to subcontractors.

Under this scheme, contractors are required to make certain deductions from their payments to subcontractors. They must also verify subcontractors’ CIS status with HMRC to determine how much to deduct.

Contractors pass these payments to HMRC, which counts them as advance payments towards the subcontractor’s tax and National Insurance. HMRC pays back any due tax refunds when the subcontractor files their tax return.

If you pay someone to do construction work for you, HMRC will class you as a contractor under the Construction Industry Scheme (CIS). All contractors must register for CIS.

Any business or individual who carries out construction work for someone else and is not an employee is a subcontractor. Registration for CIS is not compulsory for subcontractors, but those who register have tax deducted at 20%, while unregistered subcontractors have tax deducted at 30%.

Some businesses may act as both contractor and subcontractor. A business might be paid by a main contractor to work on a project and also hire other trades to help deliver the job. In this case, the business must register for CIS as both a contractor and subcontractor.

CIS covers most construction work in the UK. The terms ‘contractor’ and ‘subcontractor’ have special and wider meanings under the scheme. You can use the CIS340 guidance to confirm if it applies to your work.

There are two main groups of contractors under the Construction Industry Scheme:

1. Mainstream contractors: If you pay subcontractors for construction work in the UK, you’re a mainstream contractor.
2. Deemed contractors: If you don’t normally do construction work, but you have spent more than £3 million on construction in the 12 months since making your first payment, you are a ‘deemed’ contractor.

Contractors can be companies, partnerships or self-employed individuals. CISR12000 provides detailed guidance on different types of contractors, with examples and who must register under CIS.

Under the CIS, the following individuals and businesses are not considered contractors:

• Private householders having construction work carried out on their own home.
• Businesses that do not carry out construction operations and have not met the spending threshold that would make them a deemed contractor.

You must register as a CIS contractor when you are about to take on and pay your first subcontractor, even if you expect to pay them gross (without deductions).

Contractors can register for CIS by following HMRC’s process for setting up as a new employer. There’s a separate CIS registration process for businesses based outside the UK.

You can seek help from HMRC’s new employer helpline for questions about registering or the CIS helpline for CIS-specific queries.

As a contractor, your CIS responsibilities start before you pay your first subcontractor. You must register for CIS and follow these steps.

Before paying a new subcontractor, you must verify two things:

• Employment Status: Determine whether the individual should be treated as an employee rather than a subcontractor. If HMRC decides they were effectively your employee, you could face penalties.
• CIS Registration Status – Verify the subcontractor with HMRC to confirm if they are registered, if they have gross payment status and what deduction rate to apply. You can do this using HMRC’s free CIS online service.

HMRC gives the following deduction rate to use:

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% for subcontractors with gross payment status

To calculate a CIS deduction:

• Start with the subcontractor’s gross invoice amount.
• Subtract allowable costs the subcontractor has already paid for:
  • VAT
  • Consumable stores (e.g., materials or equipment now unusable)
  • Fuel used (excluding travel)
  • Plant hire for the specific job
  • Manufacturing or prefabrication of materials
  • Materials they purchased directly for the job

Request evidence from the subcontractor, such as receipts or proof of material purchases. If no proof is available, you’ll need to estimate the cost.

• Apply the HMRC-determined deduction rate.
• Pay the subcontractor the net amount after deduction.

If you make deductions, you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month. This statement must show:

• The gross amount
• The allowable cost deductions
• The CIS deduction rate
• The total amount deducted and paid to HMRC

Any CIS deductions you make from subcontractor payments must be passed on to HMRC. When you register as a contractor, HMRC will set up a CIS payment scheme for you.

If you already employ staff, HMRC will update your existing Pay As You Earn (PAYE) scheme to a single-employer PAYE scheme that includes CIS. This means you’ll make a single payment each month or quarter to cover:

• PAYE tax
• National Insurance contributions
• CIS deductions from subcontractors

You must pay CIS deductions to HMRC after each tax month ends. A tax month runs from the 6th of one month to the 5th of the next.

The payment deadlines are:

• By the 19th of the following month, if you pay by cheque/post
• By the 22nd of the following month, if you pay electronically

Late payments can lead to interest and penalties.

Every month, you must send HMRC a CIS monthly return showing the payments you’ve made to subcontractors and any deductions. You must also declare on each return that the subcontractors listed are not employees.

You can submit your returns using the HMRC’s CIS online service.

If you haven’t paid any subcontractors in a particular month, you must submit a “Nil Return.”

Monthly CIS returns must be submitted to HMRC by the 19th of the following tax month.

You must maintain clear records of all payments and deductions. This includes:

• The gross amount of each payment invoiced by subcontractors, excluding VAT
• Any CIS deductions made from those payments
• The cost of materials invoiced by the subcontractor, excluding VAT, if deductions were made

These records must be kept for at least three years after the end of the relevant tax year. HMRC may ask to inspect them at any time, so ensure they are complete and accessible.

You must keep HMRC updated about any significant changes to your business details or CIS activity.

You must tell HMRC if:

• You change your address (as an individual or business)
• You change your business structure (e.g., from sole trader to limited company or vice versa)
• A contractor in your business dies
• You are a multiple contractor and take on another contractor’s business (you must inform HMRC within 90 days)

You must also tell HMRC (and stop filing CIS returns) if you stop trading or using subcontractors. This applies even if you’ve only stopped using subcontractors temporarily, but you’ll have to inform HMRC if you start using subcontractors again. In this case, you can also ask HMRC to place your account in inactivity status for up to six months.

HMRC can issue penalties if you fail to comply with the CIS rules.

You could face penalties for:

• Providing false information or documents when registering for CIS
• Encouraging or assisting someone else to provide false information or documents
• Failing to submit a monthly return on time
• Not filing a return or nil return when due, even if you have not paid any subcontractors
• Submitting incomplete or incorrect returns (e.g., missing payments, wrong subcontractor details or incorrect employment status declarations)
• Failing to provide subcontractors with accurate payment and deduction statements
• Not keeping proper CIS records or failing to produce them when requested

Penalties for late CIS monthly returns start at £100 for a one-day delay. If it is still not filed, a further £200 penalty will apply after two months. After six months, HMRC can charge £300 or 5% of the CIS deductions on the return, whichever is higher. After twelve months, HMRC can charge at least another £300 or 5% of the deductions. If HMRC decides the failure was deliberate or concealed, the penalty can be much higher.

If a contractor fails to produce CIS payment records when requested, HMRC can charge penalties of up to £3,000. HMRC can also charge penalties of up to £3,000 if a contractor does not give subcontractors proper payment and deduction statements or provides statements with information that is negligently or deliberately wrong.

CIS is one part of your duty as a contractor. It deals with how you pay subcontractors and report tax to HMRC. You also have duties for how subcontractors work on your sites. You must check that subcontractors and their workers are competent, trained and properly briefed before they start work.

Many organisations qualify and train workers using manual systems that are difficult to manage without leaving critical safety gaps.

Our Contractor Management Software helps you manage the entire contractor life cycle, from pre-qualifications and inductions to performance monitoring and documentation, in one place.

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