A complete guide to the Construction Industry Scheme: deduction rates, registration, gross payment status, monthly returns and the April 2026 CIS changes.
Construction Industry Scheme (CIS) Explained for Contractors
September 10, 2026
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Construction Industry Scheme (CIS) Explained for Contractors
Quick Summary: Most CIS guides give you the 20% and 30% rates and leave you to work out the rest, which is why so many construction businesses get it wrong in ways that cost real money. This guide covers what actually determines your position: whether you are a contractor, a subcontractor or both, which work falls inside the scheme and which does not, why deductions apply to labour rather than the whole invoice, how gross payment status works and what it is worth to your cash flow, the three significant changes that took effect on 6 April 2026, and the mistakes that leave contractors paying HMRC twice for the same job.
Why CIS Costs Construction Businesses More Than It Should
CIS is not a difficult scheme in principle. A contractor withholds a percentage from what it pays a subcontractor and sends that money to HMRC. The subcontractor gets credit for it later.
The expense comes from the detail. Deduct at the wrong rate and HMRC pursues the contractor, not the subcontractor, for the shortfall, meaning you pay the subcontractor in full and then pay HMRC again. Apply the deduction to the whole invoice rather than the labour element and you have short-paid a subcontractor who will, quite reasonably, want it back. Miss a monthly return and penalties start at £100 and escalate from there.
The scheme also changed materially on 6 April 2026, and a good deal of the guidance still circulating online describes the position before that date. Two rules that were relaxed years ago are now back, and HMRC’s enforcement powers around gross payment status are considerably sharper than they were.
This guide covers the scheme as it stands now.
What the Construction Industry Scheme Actually Is
CIS is a set of tax rules that applies to payments for construction work between businesses. It exists because construction has historically had high levels of unreported self-employed income, and the scheme collects tax at source rather than waiting for a tax return.
Under CIS, a contractor deducts a percentage from the payments it makes to a subcontractor and pays that amount to HMRC. Those deductions are advance payments towards the subcontractor’s income tax and National Insurance. They are not an additional tax, and they are not lost, but they do tie up money the subcontractor has already earned, sometimes for months.
Three things follow from that, and they shape everything else in this guide:
- The contractor carries the compliance burden and the financial risk of getting it wrong.
- The subcontractor carries the cash flow cost, which is why gross payment status matters so much.
- Both sides need the paperwork to line up, because the subcontractor’s ability to reclaim depends on statements the contractor issues.
Contractor, Subcontractor, or Both?
| You are a… | If… | Registration |
| Contractor | You pay subcontractors for construction work | Compulsory before your first payment |
| Deemed contractor | Your business is outside construction but you have spent more than £3 million on construction operations in the previous 12 months | Compulsory |
| Subcontractor | You carry out construction work for a contractor | Not compulsory, but 30% is deducted if you do not register |
| Both | You subcontract work to others while also working for a main contractor | Both registrations required |
The “both” category covers a very large share of the industry. A groundworks firm working for a main contractor while paying its own labour-only subbies is a contractor and a subcontractor simultaneously, with obligations running in both directions.
Deemed contractor status catches businesses that do not think of themselves as construction at all, property investors, large retailers, manufacturers with significant site works. The £3 million test looks at spending across a rolling twelve months, so it can be triggered by a single major refurbishment.
What Counts as Construction Work
| Inside CIS | Outside CIS |
| Site preparation, groundworks, demolition | Architecture, surveying and other professional services |
| Building, alterations, extensions, repairs | Scaffolding hire with no labour supplied |
| Installing heating, lighting, power, water, ventilation | Carpet fitting |
| Plastering, decorating, roofing, plumbing, electrical | Delivering materials |
| Cleaning inside a building after construction work | Manufacturing or prefabricating materials off site |
| Erecting and dismantling scaffolding where labour is supplied | Running site facilities such as canteens |
The boundary matters because deducting CIS from a payment that falls outside the scheme is just as wrong as failing to deduct from one that falls inside it. If a supplier is delivering materials with no installation element, no deduction applies.
Mixed contracts are treated as a whole. If a single contract covers both construction and non-construction work, CIS generally applies to the full contract rather than being split.
The Three Deduction Rates
| Rate | Applies to | How the contractor knows |
| 0% | Subcontractors with gross payment status | HMRC verification confirms gross status |
| 20% | Registered subcontractors verified with HMRC | Standard rate after successful verification |
| 30% | Unregistered subcontractors, or those HMRC cannot match | Verification fails or returns unmatched |
Verification is not optional: Before the first payment to any subcontractor, the contractor must verify them with HMRC using their Unique Taxpayer Reference and either a National Insurance number or company registration number. The verification determines the rate. Guessing the rate, or carrying over a rate from a previous engagement without checking, is the most common source of CIS assessments.
The Deduction Applies to Labour, Not the Invoice Total
This is the point most often misunderstood, and it works in the subcontractor’s favour.
CIS is deducted from the labour element only. Materials that the subcontractor has genuinely paid for are excluded, as is VAT, plant hire the subcontractor has hired in from a third party, consumable stores and fuel other than for travelling.
Working example. A registered subcontractor at the 20% rate submits an invoice:
| Item | Amount |
| Labour | £2,000 |
| Materials | £800 |
| Plant hired in | £200 |
| Invoice total (net of VAT) | £3,000 |
| CIS deduction: £2,000 × 20% | −£400 |
| Payment to subcontractor | £2,600 |
Registering for CIS
Contractors must register before making the first payment to a subcontractor. Registration is through HMRC as an employer, and it sits alongside PAYE.
Subcontractors are not legally required to register, but the difference is stark: 20% if registered, 30% if not. Registration is free and takes minutes, and the higher rate applies from the first payment until it is done. Sole traders register with their UTR and National Insurance number; limited companies register the company with its UTR and company registration number.
If you operate in both capacities, both registrations are needed. They are separate and one does not imply the other.
Gross Payment Status: The Three Tests
Gross payment status means contractors pay you in full with no deduction. For a subcontractor with any volume of work, it is the difference between financing HMRC all year and holding your own money.
| Test | What it requires |
| Business test | You carry out construction work in the UK, operate through a UK bank account, and have a place of business |
| Turnover test | Net construction turnover, excluding VAT and materials, of at least £30,000 for a sole trader; £30,000 per partner or director, or £100,000 for the whole entity, under the alternative test |
| Compliance test | All tax returns and payments up to date across the previous 12 months — Self Assessment, Corporation Tax, PAYE, VAT and CIS |
Two practical notes. The turnover test looks at a genuine trading pattern rather than a single windfall contract, so one large job in an otherwise quiet year will not carry it. VAT compliance has formed part of the compliance test since 6 April 2024, which means an outstanding VAT return can now cost you gross payment status even if everything else is clean.
HMRC reviews gross payment status annually and can withdraw it where compliance slips.
What Changed on 6 April 2026
Three changes took effect at the start of the current tax year. All are now in force.
| Change | What it means |
| Nil returns reinstated | Contractors must file a monthly return even in months with no subcontractor payments, unless HMRC has been notified of a period of inactivity. This requirement was removed in 2015 and is now back. |
| Immediate removal of gross payment status | Where HMRC considers a business made or received a payment it knew, or should have known, was connected to fraudulent tax evasion, it can cancel gross payment status immediately, assess for the lost tax, and charge a penalty of up to 30%, applicable to the business or its officers. |
| Five-year reapplication bar | Where gross payment status is removed on fraud grounds, the business cannot reapply for five years, up from one year previously. |
There is one relaxation alongside them: payments made to local authorities and certain public sector bodies are now fully exempt from CIS, replacing an earlier concession.
The nil return change is the one that will catch the most businesses. A contractor with seasonal work, a gap between projects, or a quiet winter now has a filing obligation in every one of those months. Miss one and the £100 penalty applies immediately, and a pattern of missed returns feeds directly into the compliance test that determines whether you keep gross payment status.
Monthly Obligations, Deadlines and Penalties
The CIS tax month runs from the 6th of one month to the 5th of the next.
| Obligation | Deadline |
| Verify a new subcontractor | Before the first payment |
| File the monthly CIS return | 19th of the month following the end of the tax month |
| Issue payment and deduction statements to subcontractors | Within 14 days of the end of the tax month |
| Pay deductions to HMRC, electronic | 22nd of the month |
| Pay deductions to HMRC, post | 19th of the month |
The deduction statements matter more than contractors sometimes realise. They are the subcontractor’s evidence for reclaiming what has been withheld. A subcontractor who never receives them faces an argument with HMRC about money that has already left their pocket.
Late Filing Penalties
| How late | Penalty |
| 1 day | £100 |
| 2 months | A further £200 |
| 6 months | The greater of £300 or 5% of the deductions shown on the return |
| 12 months | A further penalty, the greater of £300 or 5%, with a higher charge where the failure was deliberate |
These apply to nil returns as well. A return showing zero deductions still attracts the £300 charge at six months, because the penalty is the greater of the two figures.
Getting Your CIS Deductions Back
The mechanism differs entirely depending on how the subcontractor trades, and using the wrong one causes long delays.
Sole Traders and Partnerships
Deductions are reclaimed through the Self Assessment tax return. Report your gross self-employment income, the full value invoiced, not the net amount received, deduct your allowable expenses to arrive at taxable profit, and enter the total CIS deducted in the relevant box so it is offset against your income tax and National Insurance.
Getting this wrong by entering net income is a common and expensive error, because it understates your turnover and then claims a deduction against a figure that already excludes it.
Any excess is refunded after the return is filed and processed.
Limited Companies
A limited company subcontractor cannot claim through Self Assessment. Deductions are offset against the company’s own PAYE, National Insurance and CIS liabilities, reported monthly through an Employer Payment Summary.
If deductions exceed those liabilities, the balance carries forward through the tax year, and any remaining amount can be reclaimed after the year end. Companies with few or no employees often build up substantial balances this way, which is precisely why gross payment status is worth pursuing.
The VAT Domestic Reverse Charge
Since 1 March 2021, the VAT domestic reverse charge applies to most construction services supplied between VAT-registered businesses within CIS.
Under it, the subcontractor does not charge VAT. The contractor accounts for the VAT on its own return, both as output tax and, where recoverable, as input tax. The invoice must state that the reverse charge applies and show the VAT rate that would otherwise have been used.
Two points matter for the scheme as a whole. The reverse charge does not apply where the customer is an end user or an intermediary supplier, so a subcontractor working directly for a property owner is usually outside it. And reverse charge supplies still count towards the subcontractor’s own VAT registration threshold, even though no VAT appears on the invoice. Businesses regularly miss that and register late as a result.
Mistakes That Cost Money
Not verifying, or reusing an old rate: Verification confirms the rate at the point of engagement. If a subcontractor’s status has changed and you deduct too little, HMRC recovers the shortfall from you.
Deducting from the whole invoice: Materials, VAT and hired-in plant come out of the calculation first.
Treating employees as subcontractors: CIS applies to genuinely self-employed subcontractors. Where the working relationship is really employment, HMRC can reclassify it and pursue the contractor for PAYE and National Insurance going back years, with CIS deductions offering no protection.
Forgetting nil returns: New from April 2026, and the easiest penalty in the scheme to incur.
Issuing statements late or not at all: Fourteen days from the end of the tax month, every month.
Letting the compliance test slip: A late VAT return or an unpaid Corporation Tax bill can now cost a subcontractor their gross payment status, which is a far larger financial event than the underlying failure.
Claiming net rather than gross income on a tax return: Report what you invoiced, then claim the deductions separately.
Putting It Into Practice: A Quick Checklist
- Confirmed whether you are a contractor, a subcontractor, or both, and registered for each
- Checked whether construction spending has passed £3 million in the last 12 months, if you are outside the industry
- Verified every subcontractor with HMRC before their first payment
- Set up your invoicing to separate labour, materials, plant and VAT clearly
- Confirmed the deduction is being applied to labour only
- Diarised the 19th for returns and the 22nd for electronic payment, every month
- Set a recurring reminder for nil returns in months with no subcontractor activity
- Issued payment and deduction statements within 14 days of each tax month ending
- Checked whether you meet the three gross payment status tests
- Reviewed whether your VAT, PAYE, Corporation Tax and Self Assessment filings are all current
- Confirmed you are reclaiming through the right route, Self Assessment or Employer Payment Summary
- Checked whether the VAT reverse charge applies to your supplies and whether it has affected your registration position
Key Takeaways
- CIS deduction rates are 0% for gross payment status, 20% for registered and verified subcontractors, and 30% where a subcontractor is unregistered or cannot be matched.
- Deductions apply to the labour element only; materials, VAT and hired-in plant are excluded from the calculation.
- Verification with HMRC before the first payment is compulsory, and the contractor bears the cost of getting the rate wrong.
- From 6 April 2026, monthly nil returns are compulsory again, and HMRC can cancel gross payment status immediately where fraud is suspected, with a five-year bar on reapplying.
- Late filing penalties start at £100 and reach the greater of £300 or 5% at six months, including on nil returns.
- Gross payment status requires passing a business test, a turnover test and a compliance test that now includes VAT.
- Sole traders reclaim deductions through Self Assessment; limited companies offset them through an Employer Payment Summary.
Frequently Asked Questions
What is the Construction Industry Scheme?
CIS is an HMRC scheme under which contractors deduct tax at source from payments to subcontractors for construction work and pay it to HMRC. The deductions count as advance payments towards the subcontractor’s income tax and National Insurance.
What are the CIS deduction rates?
0% for subcontractors with gross payment status, 20% for registered subcontractors verified with HMRC, and 30% for those who are unregistered or whom HMRC cannot match. The rate is set by verification, not by the contractor’s judgement.
Is CIS deducted from the whole invoice?
No. The deduction applies to the labour element only. Materials the subcontractor paid for, VAT, plant hired in from a third party, consumable stores and fuel other than for travelling are all excluded from the calculation.
Do I have to register as a subcontractor?
Registration is not legally compulsory, but unregistered subcontractors have 30% deducted rather than 20%. Registration is free and reduces the rate immediately, so there is no practical reason not to.
Do I need to file a CIS return in a month when I paid no subcontractors?
Yes, since 6 April 2026. Mandatory nil returns were reinstated at the start of the current tax year after being removed in 2015. Missing one triggers an immediate £100 penalty unless you have notified HMRC of a period of inactivity.
What is gross payment status and how do I get it?
It allows you to be paid in full with no CIS deduction. You must pass three tests: a business test, a turnover test of at least £30,000 net construction turnover per individual or £100,000 for the entity, and a compliance test covering all your tax filings and payments over the previous 12 months.
How do I get my CIS deductions back?
Sole traders and partnerships claim through Self Assessment, reporting gross income and entering the CIS deducted separately. Limited companies offset deductions against PAYE, National Insurance and CIS liabilities through a monthly Employer Payment Summary, with any excess reclaimed after the year end.
Conclusion
CIS punishes small administrative slips out of all proportion to the error. A missed verification means paying the same tax twice. A missed nil return means £100 and a mark against the compliance record that protects your gross payment status. A misapplied deduction means short-paying a subcontractor you will need again next month.
None of it is complicated. It is simply relentless, twelve returns a year, statements within fourteen days each time, verification before every new engagement, and a compliance record that now has to stay clean across VAT, PAYE, Corporation Tax and Self Assessment simultaneously.
At Aksons Accounting we handle CIS end to end for contractors and subcontractors: subcontractor verification, monthly returns including nil returns, deduction statements, gross payment status applications, and recovering what you are owed at the year end. If you are running it yourself and want a second pair of eyes on whether it is being done correctly, send us your last three months of returns and we will tell you where you stand.
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