CIS Explained – Contractors & Subcontractors

The Construction Industry Scheme (CIS) sets special tax rules for contractors and subcontractors working in construction in the UK. Instead of subcontractors receiving their pay gross and settling up at year end, contractors deduct money at source and pass it to HMRC on account of the subcontractor’s tax and National Insurance. Getting the basics wrong is one of the most common (and expensive) mistakes we see in the trade.

How the deduction works

Before a contractor pays a subcontractor for the first time, they must verify them with HMRC. HMRC then tells the contractor which rate to deduct:

20% – the standard rate for subcontractors registered under CIS
30% – charged if the subcontractor isn’t registered, or can’t be verified
0% (gross payment status) – for subcontractors who meet HMRC’s qualifying tests and are paid in full, settling their own tax through Self Assessment or Corporation Tax

The deduction only applies to the labour element of an invoice, not materials, so it’s important that invoices clearly split the two out. Whatever is deducted is treated as an advance payment towards the subcontractor’s own tax bill, not an extra cost, so it’s reclaimed or offset when their return is filed.

Gross payment status, and why it’s harder to get back if you lose it

To qualify for gross payment status, a subcontractor generally needs to pass three tests: a business test (the work is genuinely construction-related and run through a proper business bank account), a turnover test (broadly £30,000 of net construction turnover in the preceding 12 months for an individual), and a compliance test (a clean recent record of filing and paying on time). VAT compliance has counted towards that compliance test since April 2024, so a poor VAT record can cost you gross status even if your CIS and Self Assessment filing is spotless.

Since 6 April 2026, the consequences of losing gross payment status are considerably steeper. HMRC can revoke it immediately where it believes a business knew, or should have known, that fraud was taking place somewhere in its supply chain, with penalties of up to 30% of the tax lost. The reapplication ban after status is cancelled has also been extended from one year to five, so a single serious compliance failure can mean five years of 20% (or 30%) deductions instead of being paid gross. Given how much that can affect cash flow on a construction business, this is worth taking seriously rather than treating as small print.

Monthly returns, even when nothing was paid

Contractors need to file a CIS return every month, by the 19th, showing what was paid to each subcontractor and what was deducted. A “nil” return is still required in a month where no subcontractors were paid, unless HMRC has been told in advance the business is temporarily inactive (currently allowed for up to six months). Missing returns, including nil ones, is one of the most common ways contractors rack up avoidable penalties and put their own compliance record at risk.

Things that catch people out

Paying a subcontractor before verifying them with HMRC, which can leave the contractor liable for the shortfall if the wrong rate was used
Not separating materials from labour on invoices, so CIS gets deducted from the whole invoice instead of just the labour
Forgetting that CIS and the VAT domestic reverse charge for construction services often apply to the same invoice – if the reverse charge applies, the subcontractor doesn’t charge VAT at all, and the contractor accounts for it instead
Missing a monthly return because no subcontractors happened to be paid that month, without telling HMRC the business is inactive first
Assuming a good CIS record alone protects gross payment status, when VAT compliance and supply chain due diligence now matter just as much

If you’d like help getting CIS set up correctly, checking whether you qualify for gross payment status, or keeping your monthly returns on track, get in touch – or take a look at how we support construction and trades businesses.

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John is the founder of Summed Up Accountancy Services. He qualified as a Chartered Certified Accountant (ACCA) in 2006, worked in practice and then in industry as a Head of Finance, and set up Summed Up in 2019 to give growing businesses and directors straightforward, jargon-free advice.