What is CIS Tax?
CIS tax (Construction Industry Scheme tax) is a system run by HMRC that requires contractors to deduct money from payments made to subcontractors and pay it directly to HMRC. It is not a separate tax — it is an advance payment of the subcontractor's income tax and National Insurance contributions.
The Construction Industry Scheme was introduced to reduce tax evasion in the construction industry. Before CIS, many subcontractors were paid cash-in-hand and HMRC had no visibility of their earnings. CIS ensures money reaches HMRC before the subcontractor even touches it.
Who Does CIS Apply To?
CIS applies to contractors and subcontractors working in the UK construction industry.
You are a contractor under CIS if:
- You pay subcontractors for construction work
- Your business spends more than £1 million per year on construction work (even if construction is not your main business)
- You are a property developer, local authority, or housing association that engages construction workers
You are a subcontractor under CIS if:
- You do construction work for a contractor
- You are self-employed or operating through a limited company
What Counts as Construction Work?
HMRC's definition of construction work is broad. It includes:
- Building, alteration, repair, extension, and demolition of structures
- Installing heating, lighting, air conditioning, water systems, and power
- Cleaning buildings after construction work
- Painting and decorating as part of a construction project
- Groundworks, drainage, and landscaping as part of a build
- Scaffolding
It does not include:
- Architecture and surveying
- Delivery of materials (without installation)
- Manufacturing of components off-site
- Carpet fitting in an existing building (not part of construction)
CIS Deduction Rates Explained
When a contractor pays a subcontractor, they must deduct a percentage of the labour element of the invoice and pass it to HMRC. The rate depends on the subcontractor's registration status:
| Status | Deduction Rate |
|---|---|
| Gross payment status (approved by HMRC) | 0% |
| Registered CIS subcontractor | 20% |
| Unregistered subcontractor | 30% |
Why Only Labour?
CIS deductions apply only to the labour part of a subcontractor's invoice. Materials are excluded. This is why it is essential to separate labour and materials clearly on every CIS invoice. If a subcontractor provides both labour and materials, only the labour amount attracts the CIS deduction.
Example:
- Labour: £2,000
- Materials: £500
- Total invoice: £2,500
- CIS deduction (20% on labour only): £400
- Amount paid to subcontractor: £2,100
- Amount sent to HMRC: £400
How CIS Deductions Work in Practice
Step 1: Verify the Subcontractor
Before making the first payment, contractors must verify the subcontractor with HMRC. This can be done online through the Government Gateway or by phone. HMRC will confirm:
- Whether the subcontractor is registered
- What deduction rate applies (0%, 20%, or 30%)
Step 2: Make the Deduction
When paying the subcontractor, deduct the correct percentage from the labour element of the invoice.
Step 3: Issue a Payment and Deduction Statement
The contractor must give the subcontractor a Payment and Deduction Statement (sometimes called a CIS voucher) showing:
- The gross payment amount
- The amount deducted
- The net amount paid
This statement is important — subcontractors use it to prove CIS deductions when completing their Self Assessment tax return.
Step 4: Submit the Monthly Return
Contractors must file a monthly CIS return with HMRC by the 19th of each month, reporting all payments made to subcontractors in the previous tax month. Even if no payments were made, a nil return is required.
Step 5: Pay HMRC
Contractors must pay HMRC the total of all CIS deductions (plus any PAYE and National Insurance) by the 19th of each month (22nd if paying electronically).
How CIS Affects Subcontractors
If you are a subcontractor, CIS deductions are taken from your pay before you receive it. This is not final tax — it is an advance payment. At the end of the tax year, when you complete your Self Assessment return:
- If your CIS deductions were more than your total tax bill, HMRC will refund the difference
- If your CIS deductions were less than your total tax bill, you will owe the difference
Many subcontractors receive CIS refunds, particularly if they have significant business expenses to deduct.
Registering for CIS
If You Are a Subcontractor
Registering is free and takes around 10 minutes at gov.uk/register-as-subcontractor. You will need your UTR (Unique Taxpayer Reference) and National Insurance number.
Registration reduces your deduction rate from 30% to 20%. For most subcontractors, this is a significant improvement in cash flow.
If You Are a Contractor
Contractors must register before taking on their first subcontractor. Registration is done through HMRC's online services. Once registered, you must file monthly returns even in months when you make no payments.
CIS for Limited Companies
CIS applies equally to limited companies operating as subcontractors. The deductions are made in the same way. However, a limited company subcontractor can offset CIS deductions against:
- PAYE and National Insurance owed for employees
- Corporation tax
This is handled through the company's monthly employer payment summary (EPS) submissions to HMRC.
Gross Payment Status
Subcontractors with a strong compliance record can apply for gross payment status, which means no CIS deductions are made — they receive 100% of their invoiced amount. To qualify, you must meet HMRC's tests for:
- Compliance (all tax returns and payments up to date)
- Business (turnover above £30,000 for sole traders, £30,000 per partner for partnerships, £30,000 per director for companies up to £100,000)
- Turnover (net of materials costs)
Gross payment status must be renewed annually. HMRC can cancel it if compliance standards slip.
Common CIS Mistakes to Avoid
- Not verifying subcontractors — always verify before the first payment
- Deducting from materials — CIS applies to labour only
- Missing the monthly return deadline — HMRC charges £100 for the first missed return
- Applying the wrong rate — always use the rate HMRC confirmed at verification
- Not issuing payment and deduction statements — subcontractors need these for their tax returns
Making CIS Easier with FlashBill
FlashBill was built specifically for UK contractors and subcontractors dealing with CIS. It automatically calculates the correct deduction based on the rate you set, generates compliant invoices that separate labour from materials, and produces CIS Statement PDFs for your accountant.