If you work in construction, you've almost certainly come across CIS, whether that's seeing a deduction on a payment you've received, or having to make one yourself. It causes more confusion than it needs to. Here's what it actually involves.
What is the Construction Industry Scheme?
CIS is HMRC's system for collecting tax from people working in construction. Instead of a subcontractor being paid in full and sorting out their own tax at the end of the year, the contractor paying them deducts money up front and sends it to HMRC on the subcontractor's behalf. Think of it as similar in spirit to PAYE, but for self-employed subcontractors rather than employees.
It applies to most construction work in the UK: building, alterations, repairs, demolition, and site preparation are all covered. Some professional services, like pure architecture or surveying with no construction work attached, generally sit outside CIS.
Contractors and subcontractors: who deducts from whom
Under CIS, businesses fall into two (often overlapping) roles:
- Contractors pay subcontractors for construction work and are responsible for verifying them with HMRC, making the correct deduction, and filing monthly returns.
- Subcontractors carry out the work and have deductions taken from their payments before they receive them.
Many construction businesses are both, acting as a contractor on some jobs and a subcontractor on others.
How much gets deducted?
The deduction rate depends on a subcontractor's registration status with HMRC:
- Registered subcontractors have 20% deducted (the standard rate).
- Subcontractors who aren't registered for CIS have 30% deducted (the higher rate).
- Subcontractors with "gross payment status" have nothing deducted at all (0%), and handle their own tax through Self Assessment or Corporation Tax instead.
What contractors need to do
If you pay subcontractors, you need to be CIS-registered as a contractor, verify each subcontractor with HMRC before paying them (this confirms their deduction rate), deduct the right amount from each payment, and file a CIS return every month, even in months where you haven't paid anyone. Missing a monthly return is one of the most common (and avoidable) causes of CIS penalties.
What subcontractors need to do
If you're a subcontractor, register for CIS so you're not deducted at the higher rate, keep records of every deduction statement your contractors give you, and include those deductions when you complete your Self Assessment or Corporation Tax return, since they count as tax you've already paid.
This last point is where a lot of subcontractors lose out: if your CIS deductions over the year add up to more than your actual tax bill, you're owed a refund. But HMRC won't work that out and pay it automatically. You have to claim it.
The refund most subcontractors don't chase
Because CIS deductions are taken at a flat rate regardless of your actual expenses or personal allowance, many subcontractors overpay through the year without realising it. The only way to get that money back is by filing an accurate Self Assessment return that reconciles your CIS deductions against what you actually owe.
This is one of the most common gaps we find when a construction business switches to us: CIS deductions that were never properly reclaimed, sometimes for more than one tax year.
Getting CIS right
None of this is complicated in isolation, but it adds up: verification, monthly returns, deduction statements, and an accurate reconciliation at year-end. Get any one part wrong and you're either paying more tax than you need to, or risking a penalty for a missed return.
Rehan Razzaq, FCCA
ACCA Chartered Certified and a Xero Certified Advisor, helping UK construction businesses with accounts, tax and financial planning.
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