What is CIS and who does it apply to?
The Construction Industry Scheme (CIS) is a HMRC tax scheme that requires contractors to deduct money from subcontractor payments and pass it directly to HMRC. It applies to most construction work in the UK, including site preparation, demolition, building, alterations, repairs, and decoration.
If you are a general contractor paying subcontractors for construction work, CIS applies to you. Registration is not optional, and the penalties for non-compliance accumulate quickly.
Who needs to register for CIS?
You need to register as a CIS contractor if you pay subcontractors for construction work. This applies whether you are a sole trader, partnership, or limited company. You register via the HMRC CIS online service, separately from your standard income tax or corporation tax registration.
Once registered, you have ongoing monthly obligations regardless of whether you made any CIS payments in a given month. Subcontractors can also register with CIS to receive the 20% deduction rate rather than the default 30% rate. Those with a strong compliance record can apply for gross payment status, meaning no deductions are taken at source at all.
CIS deduction rates explained
There are three CIS deduction rates:
- 20% for subcontractors registered with CIS and verified by HMRC
- 30% for subcontractors not registered with CIS or who cannot be verified
- 0% for subcontractors with gross payment status, confirmed by HMRC
The deduction applies to the labour element of the payment only. Materials are excluded. If a subcontractor invoices £8,000 for labour and £3,000 for materials, the CIS deduction is calculated on the £8,000 only. Materials must be itemised separately on the invoice for this to work cleanly.
Always verify a subcontractor's CIS status with HMRC before making the first payment. You cannot rely on the subcontractor's own confirmation of their status.
How to verify a subcontractor's CIS status
Verification is done via the HMRC CIS online service or by phone. You will need:
- Your own Contractor Reference Number
- The subcontractor's Unique Taxpayer Reference (UTR)
- The subcontractor's National Insurance number (for individuals) or Company Registration Number (for limited companies)
HMRC will confirm the deduction rate that applies. Record the verification reference number. If you cannot verify, apply the 30% rate. You only need to verify a subcontractor once unless they leave your books for two or more full tax years.
CIS monthly returns: your obligations to HMRC
Every month in which you make CIS payments, you must submit a CIS monthly return to HMRC. The deadline is the 19th of the following month. The return must include:
- Each subcontractor paid, with their UTR
- Gross amount paid to each sub
- Materials costs excluded from the deduction calculation
- CIS deduction taken
- Net amount paid
You also need to provide each subcontractor with a payment and deduction statement showing the same information. This is the document they use to reconcile their own tax position with HMRC.
Even if you made no CIS payments in a given month, you must file a nil return unless you have formally notified HMRC of an inactivity period.
Penalties for getting CIS wrong
HMRC penalties for CIS non-compliance are automatic and escalate fast:
- Late monthly return: £100 for the first month, rising to £200, then £300 for further months. After 12 months, a penalty of up to £3,000 can apply.
- Incorrect return: Penalties based on behaviour, from 0% for a prompted honest mistake to 100% of the understated tax for deliberate concealment.
- Failure to deduct: You become personally liable for the amount HMRC would have collected, even if the subcontractor has since paid their own tax.
Construction recorded 4,032 business insolvencies in 2024, the highest of any UK sector (Hill Dickinson, 2025). CIS liabilities that accumulate quietly across multiple projects are a real contributing factor for firms operating on thin margins.
Managing CIS at scale across 20 to 40 subcontractors
For an SME general contractor with 20 to 40 subcontractors per project, CIS is not a one-line calculation. Each sub has a different rate, a different materials split, and potentially different verification status. When invoices arrive via WhatsApp and email in inconsistent formats, calculating and documenting the correct CIS position for every sub becomes a significant monthly exercise.
Petl Pay's internal research puts the average SME GC at 16 hours per month on subcontractor invoice and payment admin. CIS calculation is a meaningful part of that figure. Automating it removes the manual step and the margin for error that comes with doing it by hand across dozens of subs on multiple concurrent projects.
Petl Pay calculates CIS deductions automatically within the project payment workflow. When a subcontractor's invoice is approved, the correct deduction is applied and documented without manual calculation, and a full audit trail is maintained per transaction. Learn more at petlpay.com.
Frequently Asked Questions
What is the Construction Industry Scheme (CIS)?
CIS is a HMRC tax scheme requiring contractors to deduct income tax from payments to subcontractors for construction work and pass those deductions to HMRC. It applies to most UK construction activity including site preparation, demolition, building, alteration, and repair work.
What CIS deduction rate should I apply?
20% for subcontractors registered with CIS, 30% for unregistered subcontractors, and 0% for those with gross payment status. Always verify the correct rate with HMRC before the first payment. Do not rely on the subcontractor's own confirmation of their status.
Does CIS apply to materials as well as labour?
No. CIS deductions apply to the labour element of a payment only. If a subcontractor's invoice includes both labour and materials, the deduction is calculated on the labour portion only. Materials must be itemised separately on the invoice.
What happens if I fail to deduct CIS?
You become personally liable for the tax HMRC would have collected, even if the subcontractor pays their own tax separately. HMRC can pursue contractors for underpaid CIS with penalties on top of the outstanding amount.
Do I need to file a CIS return every month?
Yes, even if you made no CIS payments that month. You must file a nil return or formally notify HMRC of an inactivity period. The deadline is the 19th of the following month. Automatic penalties apply for late submission.
Can a subcontractor be exempt from CIS deductions?
Yes. Subcontractors with gross payment status are exempt from CIS deductions at source. They must apply to HMRC for this status based on their compliance record. You must still verify their status with HMRC directly before treating them as exempt.
