Construction Industry Scheme (CIS): A Complete Guide to Deductions and Monthly Returns

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of HMRC rules that apply to payments made by contractors to subcontractors in the construction industry. Under CIS, contractors must deduct a percentage from payments to subcontractors and pass those deductions to HMRC. The subcontractor then receives credit for these deductions against their own tax liability. The scheme is designed to reduce tax evasion in the construction sector, which has historically been a high-risk area for non-compliance.

Who Needs to Register?

Registration is mandatory for all contractors who pay subcontractors in the construction industry. A "contractor" in CIS terms includes construction companies, property developers, and any business that spends more than £3 million on construction in a 12-month period (even if construction is not their main activity — this catches organisations like housing associations, local authorities, and large retailers). Subcontractors do not have to register, but unregistered subcontractors face a higher deduction rate, so registration is strongly recommended.

As a subcontractor, you can register as a sole trader, a partnership, or a limited company. You need to provide HMRC with your business details, Unique Taxpayer Reference (UTR), and National Insurance number. Registration can be done online or by phone.

CIS Deduction Rates

There are three deduction rates under CIS:

• 20% — the standard rate for registered subcontractors. This is deducted from the labour element of the payment (materials are excluded).
• 30% — the higher rate for unregistered subcontractors. If a subcontractor has not registered with HMRC for CIS, the contractor must deduct 30% from their payments.
• 0% — for subcontractors with Gross Payment Status (GPS). These subcontractors receive their full payment with no deductions.

Deductions apply only to the labour element of the payment. If a subcontractor provides materials as part of the job, the cost of materials (supported by evidence such as invoices) is excluded from the deduction calculation. VAT is also excluded from the amount on which deductions are calculated.

Calculating CIS Deductions

CIS deductions apply only to the labour element of a payment. If a subcontractor's invoice includes the cost of materials they have supplied, these materials are excluded from the deduction calculation. However, the subcontractor must provide evidence of the material costs (such as supplier invoices). If they cannot substantiate the materials element, you must apply deductions to the full amount.

Here is a worked example:

• A subcontractor invoices you for £5,000, comprising £3,500 for labour and £1,500 for materials
• The subcontractor is registered at the standard rate (20%)
• CIS deduction: 20% of £3,500 = £700
• Amount you pay the subcontractor: £5,000 - £700 = £4,300
• Amount you pay to HMRC: £700

VAT, if applicable, is excluded from the deduction calculation. If the subcontractor is VAT-registered and the £5,000 is plus VAT, you deduct 20% from the £3,500 labour element only, and pay the VAT in full to the subcontractor.

Verifying Your Subcontractors

Before making a first payment to a new subcontractor (or after a break in payments), you must verify them with HMRC. Verification confirms their CIS registration status and tells you which deduction rate to apply. You can verify subcontractors online through HMRC's CIS system or through CIS-compatible software.

To verify an individual subcontractor, you need their name, UTR, and National Insurance number. For a limited company subcontractor, you need the company name, UTR, and company registration number. HMRC will confirm one of three outcomes:

• Registered — gross payment status: Deduct 0% (pay the full amount)
• Registered — net payment status: Deduct 20% from the labour element
• Not registered: Deduct 30% from the labour element

Keep a record of the verification reference number and the date of verification for each subcontractor. You will need these for your CIS returns.

Monthly CIS Returns: Tax Months and Deadlines

The CIS tax month runs from the 6th of one month to the 5th of the next (the same as the PAYE tax month). Your CIS return for each tax month must be submitted to HMRC by the 19th of the following month. For example, the return covering the period 6 June to 5 July 2026 must be filed by 19 July 2026. CIS deductions must be paid to HMRC by the 22nd of the month if paying electronically (19th if paying by cheque).

If you have not made any payments to subcontractors during a particular tax month, you must still submit a nil return. Many contractors are caught out by this requirement — assuming that no activity means no filing obligation. HMRC will issue a penalty for each month a return is late, regardless of whether any payments were made.

What Information Goes on a CIS Return?

Each CIS return must include the following information for every subcontractor you have paid during the tax month:

• The subcontractor's name and Unique Taxpayer Reference (UTR)
• The subcontractor's verification reference number
• The gross amount paid (before deductions)
• The cost of materials included in the payment (these are excluded from deductions)
• The amount of CIS deductions applied
• The deduction rate used (0%, 20%, or 30%)

You must also include a declaration confirming that the employment status of each worker has been considered and that none of the subcontractors listed should actually be treated as employees. This is an important compliance point — HMRC uses CIS returns to identify potential employment status issues.

Penalties for Late or Incorrect Returns

HMRC imposes automatic penalties for late CIS returns:

• 1 day late: £100 penalty
• 2 months late: Additional £200 penalty
• 6 months late: Additional penalty of the greater of 5% of the CIS deductions on the return or £300
• 12 months late: Additional penalty of the greater of 5% of the CIS deductions or £300 (can be up to 100% of the deductions in serious cases)

These penalties apply to each return individually, so if you miss several months, the penalties accumulate quickly. In addition to late-filing penalties, HMRC can charge penalties for inaccurate returns, failure to verify subcontractors, and failure to make CIS deductions when required. Interest is also charged on late payments of CIS deductions.

Gross Payment Status

Gross Payment Status (GPS) allows subcontractors to receive their full payment without any CIS deductions. This is a significant cash flow advantage, as you do not have to wait until the end of the year to reclaim your deductions. To qualify for GPS, you must meet three tests:

• Business test: You must carry on a business in the UK that includes construction work.
• Turnover test: Your net construction turnover must be at least £30,000 per year (for sole traders) or £30,000 per partner per year (for partnerships). For companies, the threshold is £30,000 per director.
• Compliance test: You must have a good compliance record with HMRC — no late tax returns, no late tax payments, and no outstanding tax debts.

HMRC reviews GPS status annually and can revoke it if you fail to meet the compliance test. Losing GPS can have a serious impact on your cash flow, so it is essential to keep your tax affairs in order.

CIS Deductions and Your Own Tax Position

If you are a subcontractor as well as a contractor (which is common in the construction industry), the CIS deductions that other contractors take from your payments can be offset against your own tax liabilities. For sole traders, CIS deductions suffered are credited against your Income Tax and NIC liability on your Self Assessment return. For limited companies, CIS deductions suffered can be offset against your PAYE, NIC, and CIS liabilities through the monthly Employer Payment Summary (EPS). If the deductions exceed your liabilities, you can claim a refund from HMRC.

Keeping accurate records of all CIS deductions — both those you make from subcontractors and those suffered on your own income — is essential for reconciling your position at year-end and ensuring you do not overpay tax.

Common CIS Compliance Issues

HMRC actively polices CIS compliance and carries out regular reviews and inspections. Common issues include:

• Failing to verify subcontractors — This can result in applying the wrong deduction rate and potential penalties.
• Not submitting monthly returns on time — Even nil returns must be filed; late filing penalties accumulate quickly.
• Incorrect treatment of materials — Contractors must ensure that only genuine material costs are excluded from deduction calculations.
• Employment status issues — If HMRC determines that a person treated as a subcontractor is actually an employee, the contractor may face backdated PAYE and NIC liabilities, plus penalties and interest.
• Record-keeping failures — You must keep records of all CIS payments, deductions, and verification details for at least three years after the end of the tax year to which they relate.

How London Accountants Can Help

CIS compliance can be complex, particularly for businesses that act as both contractors and subcontractors. We handle CIS registration, monthly verification of subcontractors, preparation and submission of monthly CIS returns, year-end reconciliation and refund claims, and advice on employment status and Gross Payment Status applications. Our fixed-fee CIS packages give you certainty on costs and peace of mind that your compliance obligations are being met. Get in touch for a free initial consultation.

Construction businesses should also visit our construction industry page to see our full range of specialist services, including CIS returns and construction payroll.