If you work in construction in the UK—whether as a contractor, a subcontractor, or both—it’s essential to understand how the Construction Industry Scheme (CIS) works. The CIS is designed to regulate the way payments are made from contractors to subcontractors, ensuring that tax is properly deducted and paid to HMRC. In this beginner’s guide, we’ll break down the essentials of CIS, who it applies to, and what you need to do to stay compliant.
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a set of rules from HMRC that requires contractors to deduct tax from the money they pay to subcontractors. These CIS deductions must be passed on to HMRC (by the contractor) and count as advance payments towards the subcontractor’s tax and National Insurance.
The scheme was introduced to combat tax evasion in the construction sector, which has a high proportion of self-employed workers. CIS helps ensure that the correct amount of tax is collected on earnings in the industry.
Who Needs to Register for CIS?
1. Contractors – If you pay subcontractors to carry out construction work, you need to register as a CIS contractor. This includes companies, partnerships, and even self-employed individuals. You must also register if, over a 12-month period, you spend more than £3 million on construction (even if it’s not your core business).
2. Subcontractors – If you carry out construction work for a contractor, you’re classed as a subcontractor and need to register for CIS. Registering ensures that less tax is deducted from your payments. If you don’t register, contractors must deduct tax at the higher rate of 30% rather than the standard 20%, these rates apply as at May 2025 – the time of writing this blog.
Note – The CIS deductions only apply to the labour portion of your invoices, not the cost of materials, VAT, or certain other expenses. Make sure your invoices clearly break down labour and materials to avoid overpaying on CIS deductions.
Note – You may need to register as both a contractor and a subcontractor. This applies if you do construction work directly for end user clients and you also take on work as a subcontractor for other contractors. Many businesses fall into both categories, so make sure you’re registered appropriately to keep everything above board.
What Type of Work Does CIS Cover?
CIS covers most construction work, including:
- Site preparation.
- Alterations, dismantling, construction, repairs, and decorating.
- Demolition and removal of structures.
- Installation of systems for heating, lighting, power, water, and ventilation.
Some work, such as architecture, surveying, and the supply of materials only, is exempt. However, if you’re unsure, it’s always worth checking HMRC’s guidance or consulting with a specialist.
How Does CIS Work?
For Contractors:
- Register with HMRC as a contractor under the CIS.
- Verify your subcontractors with HMRC before making payments.
- Deduct the correct amount of tax (20% for registered subcontractors, 30% if not registered).
- File your contractors monthly CIS return and pay the deductions to HMRC.
- Provide deduction statements to subcontractors for their records.
For Subcontractors:
- Register with HMRC as a subcontractor to benefit from the standard 20% deduction.
- Keep all deduction statements provided by contractors.
- Include CIS deductions on your tax return—they count as advance payments towards your overall tax liability.
Why is CIS Important?
Failing to comply with CIS can lead to hefty fines and penalties from HMRC. For subcontractors, being unregistered means higher deductions from income, affecting your cash flow.
Staying compliant ensures smooth business operations, avoids legal trouble, and helps you build a trustworthy reputation with clients.
Tips for Staying Compliant
- Register early – Don’t leave CIS registration to the last minute.
- Keep accurate records – Maintain detailed records of payments, deductions, and verifications.
- File returns on time – Contractors must submit monthly CIS returns—even if no payments have been made that period.
- Seek professional advice – If you’re unsure about any aspect of CIS, consult with a bookkeeper or accountant experienced in the construction sector.
Final Thoughts
The Construction Industry Scheme can seem daunting at first, but understanding the basics is the first step to compliance and peace of mind. Whether you’re a contractor or subcontractor, taking the time to register, track your payments, and stay up to date with HMRC’s requirements is essential for success in the construction industry.
If you have questions about CIS or need help managing your bookkeeping and tax obligations, BizAssist4u is here to help. Contact us today to find out how we can take the stress out of construction administration and bookkeeping.
Disclaimer: The content on our site is for general information only and not professional advice. Always seek professional guidance before acting on any information here. While we strive for accuracy, we cannot guarantee completeness or timeliness of the content.