What Is the Construction Industry Scheme?

What CIS is

The Construction Industry Scheme is an HMRC system for certain construction work. Contractors verify subcontractors, deduct tax from qualifying labour payments and send those deductions to HMRC. The deductions count as payments toward the subcontractor’s eventual tax position.

CIS is a tax mechanism; it does not by itself decide whether someone is employed or self-employed. Employment status must be considered separately.

Contractor and subcontractor

A contractor pays other businesses or people for construction operations. A subcontractor carries out construction work for a contractor. The same business can be both, acting as a subcontractor on one project and paying subcontractors on another.

Work covered

CIS can apply to building, repairs, decorating, demolition, site preparation, installation and other construction operations. Some work is excluded and mixed contracts can be technical, so classification should be checked before payments are made.

Deduction rates

Deductions normally apply to the labour element rather than properly separated qualifying materials. Contractors must follow the verification result provided by HMRC.

A simple example

For a £4,000 labour payment, a verified subcontractor at 20% has £800 sent to HMRC and receives £3,200. An unverified subcontractor at 30% has £1,200 sent to HMRC and receives £2,800. Registration and correct details therefore matter.

Gross payment status

An approved subcontractor can be paid gross without CIS deductions. The income is not tax-free; the subcontractor remains responsible for tax through the normal return and payment process. HMRC applies eligibility and compliance tests.

Self Assessment and companies

A self-employed subcontractor normally reports gross income and allowable expenses through Self Assessment and claims credit for valid deductions. A limited company uses the relevant company and payroll process for CIS deductions. The treatment is not identical, so the client’s records must show gross income and deductions separately.

Records to keep

• Sales invoices and bank receipts.
• Monthly payment and deduction statements.
• Materials and expense evidence.
• Contractor verification and payment records.
• CIS returns where the business is a contractor.
• Mileage and travel records where relevant.

Common CIS mistakes

• Assuming CIS deductions prove employment status.
• Failing to register and suffering the higher deduction rate.
• Losing monthly deduction statements.
• Reporting only the net amount received instead of gross income.
• Deducting CIS from materials without applying the rules correctly.
• A limited company trying to claim deductions through an individual’s Self Assessment.

Practical next steps

1. Confirm whether the work falls within CIS.
2. Register as contractor or subcontractor where required.
3. Supply accurate details for verification.
4. Keep every deduction statement.
5. Separate gross income, materials, expenses and deductions.
6. File the correct individual or company returns.