Under the Construction Industry Scheme, a contractor takes a slice off what they pay you and sends it to HMRC instead. It is not a tax in itself. It is an advance payment of the tax you were going to owe anyway, and for most subcontractors it turns into a refund.
Who is in it
- A contractor is anyone who pays subcontractors for construction work. If you take someone on to help you, you are one too.
- A deemed contractor is a business outside construction that spends more than £3 million on construction in twelve months.
- A subcontractor is anyone doing construction work for a contractor. Plenty of people are both, and have to register as both.
Covered: site preparation, groundworks, demolition, building, alterations, repairs, decorating, installing heating, lighting, power, water and ventilation, and cleaning a building’s inside after the work. Temporary structures and civil engineering count.
Not covered: architecture and surveying, carpet fitting, scaffolding hire without labour, manufacturing materials or plant, delivering materials, and services on site that are not construction at all — canteen, security, medical, site facilities. Work for a private householder on their own home is outside CIS too.
The three rates
The ten points between 30% and 20% are the cheapest money in construction. Registering is free and takes minutes.
What the percentage comes off — the bit everyone gets wrong
The deduction is not taken from your invoice total. The contractor strips certain things out first.
| Taken out before the deduction | Left in, and deducted from |
|---|---|
| VAT you have charged Materials, at the direct cost you paid Consumable stores Plant you have hired in from someone else Fuel other than for travelling Manufacturing and prefabrication costs |
Your labour Travel and subsistence, including accommodation and fuel for travelling — even when the contract says they will pay them Plant you own yourself Materials you were reimbursed for by someone else |
Worked example
You invoice a contractor £1,000 labour, £400 materials you bought yourself, and £100 travel, plus VAT. You are registered and verified, so the rate is 20%.
The deduction is taken from £1,100 — labour plus travel. That is £220. Your materials and the VAT are untouched. Travel catches people out every time: it is inside the deduction, not outside it.
Contractors are required to satisfy themselves that a materials figure has not been inflated, so keep the receipts. If you will not show what the materials cost, they are entitled to estimate — and the estimate will not be in your favour.
Registering, and being verified
Register online with HMRC. You need your UTR, your National Insurance number and your business name, plus your VAT number if you have one. No UTR yet? Register as a new business for Self Assessment and tick the subcontractor option; you get both registrations together.
Before paying you the first time, the contractor verifies you with HMRC and is told which rate to use. If HMRC cannot match you, the rate is 30%. They do not have to verify you again if they have paid you in the current or previous two tax years.
Payment and deduction statements
Your contractor must give you a statement for each tax month in which they paid you, within 14 days of the tax month ending — so, by the 19th. It shows the gross payment, the materials taken out and the amount deducted.
Keep every single one. They are how you prove what has already been paid on your behalf, and they are what the refund is calculated from. If a contractor has gone under and you cannot get one, contact HMRC with the dates and amounts and explain.
Getting the money back
On your tax return you enter your turnover gross — the full amount invoiced, before deductions — and put the CIS deductions in their own box. HMRC works out what you actually owe, sets the deductions against it, and refunds the difference.
The order is: income tax first, then Class 4 National Insurance, then a repayment of whatever is left. Refunds are common in the trades for a simple reason: 20% comes off your labour from the very first pound, taking no account of your £12,570 personal allowance or a penny of your expenses. A subcontractor with an ordinary year’s tools, van and insurance has almost always overpaid.
If you work through a limited company
Different route. You claim CIS deductions through payroll — file your usual FPS, then an Employer Payment Summary showing the year-to-date deductions, which HMRC sets against your PAYE bill. Do not try to settle it through your Corporation Tax return; HMRC can penalise you for it.
Gross payment status
Gross payment status means being paid in full, with nothing deducted, and settling your tax at the year end like any other business. You have to pass three tests:
- Business test — you do construction work in the UK and run the business through a bank account.
- Turnover test — in the last 12 months, excluding VAT and materials: £30,000 for a sole trader; £30,000 per partner or £100,000 for a partnership; £30,000 per director or £100,000 for a company.
- Compliance test — your tax and National Insurance filed and paid on time. Since April 2024 this includes your VAT filing and payments. Minor slips and reasonable excuses are allowed for, but HMRC can now cancel gross status immediately where it suspects fraud.
The public GOV.UK page on gross payment status still describes the compliance test without mentioning VAT. The VAT requirement is real and came in on 6 April 2024.
The VAT reverse charge
If you are VAT registered and working for another VAT-registered business on work that falls within CIS, you generally do not charge VAT. Your customer accounts for it themselves. Your invoice shows the VAT rate or the amount due under the reverse charge, but does not add it to the total, and carries wording such as Reverse charge: VAT Act 1994 Section 55A applies or Customer to pay the VAT to HMRC.
It does not apply to work for an end user — a customer who is not selling construction services on, which includes householders — or to zero-rated work, or to supplies of workers by an employment business. End users have to confirm their status to you in writing; once they have, you do not need to keep asking.
Plan for the cash-flow difference. Businesses that used to hold their customers’ VAT between quarters lost that cushion, and many moved to monthly VAT returns as a result.
If you take on subcontractors yourself
The moment you pay someone else for construction work you are a contractor, with a contractor’s obligations: register, verify everyone before their first payment, deduct at the right rate, issue statements by the 19th, and file a monthly return by the 19th covering the tax month that ended on the 5th.
| Late by | Penalty |
|---|---|
| 1 day | £100 |
| 2 months | £200 |
| 6 months | £300, or 5% of the deductions if higher |
| 12 months | £300, or 5% of the deductions if higher |
| Over 12 months | Up to £3,000, or 100% of the deductions, in serious cases |
What changed on 6 April 2026
- Nil returns are back. If you paid no subcontractors in a month you must file a nil return, unless you have told HMRC in advance that you will not be making payments. This reverses the 2015 relaxation and exists to stop wrong penalties being issued.
- Payments to local authorities and public bodies are out of CIS — no deduction where they are the subcontractor.
Where we come in
Most of the adults who train with us end up subcontracting, so this comes up on every course we run. If you are weighing up going out on your own, start with our guide to going self-employed in construction — and ring 0151 666 2180 if you want to talk about the training side.
Checked against GOV.UK, HMRC’s CIS 340 guide and the HMRC Construction Industry Scheme Reform manual. Every effort has been made to make sure this information was correct at the time of production, September 2026, but CIS rules and rates change. This is general information, not tax advice — we are a training provider, not accountants — so always check your own position with your accountant or tax adviser, or with HMRC, before you act on anything here.