The Construction Industry Scheme (CIS) is one of the most important tax systems for contractors, subcontractors, and construction businesses in the UK. Understanding the rules of CIS construction is essential for staying compliant, avoiding penalties, and ensuring your business runs smoothly. Whether you are new to the scheme or simply need a refresher, this guide provides everything you must know.
CIS was introduced by HMRC to regulate how contractors pay subcontractors in the construction sector. The goal is to reduce tax evasion and ensure taxes are collected at the source. Under CIS construction, contractors deduct a percentage of the subcontractor’s payment and pass it directly to HMRC. While it sounds straightforward, the rules can be complex—especially for growing businesses.
1. What Is CIS and Who Does It Apply To?
The Construction Industry Scheme applies to businesses that work in construction or hire subcontractors for construction-related tasks. It covers activities like:
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Building work
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Renovations
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Repairs
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Demolitions
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Site preparation
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Decorating and installation
If you pay subcontractors for construction work, you are considered a contractor under CIS construction. Even non-construction companies—such as property developers or large businesses—may fall under CIS if they spend £1 million or more on construction in a three-year period.
Understanding who qualifies is the first step toward full compliance.
2. Contractor Responsibilities Under CIS
Contractors have several legal obligations under CIS construction. These responsibilities ensure proper tax deduction and reporting to HMRC.
a. Verifying Subcontractors
Before making any payment, contractors must verify subcontractors with HMRC to check their deduction rate. Subcontractors can be:
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Registered for CIS – taxed at 20%
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Not registered – taxed at 30%
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Eligible for gross payment status – taxed at 0%
Verification is done through the HMRC portal or accounting software that supports CIS construction.
b. Making Deductions
Contractors must deduct the correct tax rate from each subcontractor’s payment (20% or 30% unless gross payment applies). These deductions must be passed to HMRC monthly.
Failing to make accurate deductions can lead to severe penalties.
c. Filing Monthly CIS Returns
Every month, contractors are required to submit CIS returns showing:
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Total payments made
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Deductions taken
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Subcontractors paid
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Verification details
Returns must be filed even if no payments were made during that month.
d. Providing Payment Statements
Monthly statements must be sent to subcontractors detailing:
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Gross payment
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Deduction amount
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Net payment
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Material costs
These statements help subcontractors claim tax refunds or reconcile their tax accounts.
3. Subcontractor Responsibilities Under CIS
Subcontractors also have responsibilities in CIS construction, including:
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Registering for CIS to avoid higher deductions
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Keeping accurate records of payments
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Reporting income on tax returns
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Claiming back overpaid CIS deductions
Many subcontractors often receive tax rebates at the end of the year because CIS deductions are usually higher than their actual tax liability.
4. What Types of Work Are Covered Under CIS?
Most building and construction work is covered, including:
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Foundations
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Bricklaying
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Plastering
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Roofing
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Electrical work
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Plumbing
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Painting and decorating
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Landscaping that involves construction
However, some activities are excluded from CIS construction, such as:
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Architecture and surveying
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Carpet fitting
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Material delivery
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Scaffold hire without labour
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Support services like cleaning
Understanding what is included helps contractors avoid filing incorrect returns.
5. Paying Subcontractors: Step-by-Step Compliance
To help contractors stay compliant with HMRC rules, here is a simplified process:
Step 1: Verify the Subcontractor
Check their status to know whether to deduct 20%, 30%, or apply gross payment.
Step 2: Calculate Deduction
Deduct the appropriate percentage from the labour portion of the invoice. Material costs should not be taxed.
Step 3: Pay HMRC
Deductions must be paid by the 22nd of the following month if paying electronically.
Step 4: File Monthly CIS Return
Submit accurate details of all subcontractor payments.
Step 5: Give Subcontractor Their Statement
Provide a detailed breakdown so they can claim tax refunds if needed.
Following these steps ensures full compliance with CIS construction rules.
6. Penalties for CIS Non-Compliance
HMRC imposes strict penalties for late or inaccurate CIS returns. These include:
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£100 fine for late filings
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Additional penalties depending on delay duration
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Penalties for incorrect deductions
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Possible audits or investigations
CIS compliance should be a priority for every contractor, especially in large-scale CIS construction projects where multiple subcontractors are involved.
7. Benefits of CIS Compliance
Being compliant with the scheme offers several advantages:
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Avoids penalties and audits
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Builds trust with subcontractors
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Improves business credibility
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Streamlines tax reporting
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Helps maintain financial accuracy
Many businesses integrate digital tools to simplify the compliance process. Accounting software designed for CIS construction can automate deductions, create statements, and verify subcontractors instantly.
8. Common Mistakes Contractors Should Avoid
Contractors often make mistakes that lead to penalties or compliance issues. Some common errors include:
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Failing to verify subcontractors
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Deducting CIS from material costs
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Missing monthly filing deadlines
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Incorrect deduction percentages
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Not keeping proper records
Double-checking every submission and using software can reduce errors significantly.
9. How Digital Tools Improve CIS Efficiency
Modern construction businesses use software for tracking payments, deductions, and verification. Digital CIS tools help with:
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Automatic calculation of deductions
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Real-time verification
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Instant payment statements
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Faster monthly return filing
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Error prevention
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Cloud-based record storage
Using technology not only simplifies CIS construction processes but also reduces administrative workload.
FAQ
1. What is the purpose of the CIS scheme?
The scheme ensures that contractors deduct tax from subcontractor payments, helping HMRC collect taxes at the source and reduce tax evasion.
2. Do subcontractors get tax refunds?
Yes. Many subcontractors overpay due to CIS deductions and later receive tax refunds through their self-assessment returns.
3. Is CIS mandatory?
Yes. If you hire subcontractors for construction work, you must register as a contractor under CIS.
4. What happens if I don’t file my CIS return?
HMRC charges penalties starting at £100 for late submissions. Continued delays lead to higher fines.
5. Can a business outside the construction industry be under CIS?
Yes. If a company spends £1 million or more in construction over three years, it qualifies as a contractor for CIS purposes.
Conclusion
Understanding the rules of CIS construction is essential for every contractor operating in the UK. The scheme may seem complex at first, but with proper knowledge, accurate record-keeping, and the right tools, compliance becomes much easier. By learning your responsibilities as a contractor or subcontractor, you can avoid penalties, simplify tax management, and maintain strong relationships within the construction industry.