Construction Industry Scheme

The Construction Industry Scheme (CIS) sets out special tax rules for subcontractors working in the UK construction industry. Under CIS, contractors must deduct money from subcontractors' payments and pass it directly to HMRC. The deductions count as advance payments towards the subcontractor's tax bill. The scheme covers most construction work including repairs, decoration, demolition, site preparation, and civil engineering. It applies across England, Scotland, Wales, and Northern Ireland. Contractors and subcontractors have distinct registration and reporting obligations under the scheme.

Who Must Register

Any business that pays subcontractors for construction work must register as a CIS contractor. This covers main contractors, developers, and any business that carries out construction work and spends more than £1 million on construction operations in the previous 12 months (the "construction spend test"). A contractor can be a sole trader, partnership, limited company, or public body. If you are a subcontractor, you register to receive payment under the scheme — your customer (the contractor) will deduct tax from your payments and pass it to HMRC. Subcontractors who fail to register will have a higher deduction rate applied (30% instead of 20%).

Verification and Deduction Rates

Before making the first payment to a new subcontractor, the contractor must verify the subcontractor with HMRC. Verification can be done online through the CIS online service or via payroll software. HMRC will confirm the subcontractor's status and deduction rate. There are three deduction rates: 20% for registered CIS subcontractors (standard rate), 30% for subcontractors who have not registered for CIS (higher rate), and 0% for subcontractors holding a valid Gross Payment Status (GPS). Subcontractors with GPS receive the full payment and must account for their own tax through Self Assessment. To qualify for GPS, a business must meet HMRC's turnover, compliance, and business tests — including a minimum turnover of £30,000 per year (or £100,000 for a company) and a consistent history of filing returns and paying tax on time.

Monthly Returns (CIS300)

Contractors must submit a CIS monthly return (CIS300) to HMRC by the 19th of each month (or 22nd if filing electronically). The return details all payments made to subcontractors and the deductions applied. Contractors must also give each subcontractor a payment and deduction statement (CIS25 for standard deductions, CIS26 for no deductions) within 14 days of the end of the tax month. If no payments are made in a month, a nil return is still required unless the contractor registered as "dormant" or has ceased trading. Failure to file monthly returns on time incurs automatic penalties: £100 per month for each month the return is late for the first six months, with additional penalties for longer delays.

Subcontractor Record-Keeping

Subcontractors who receive deductions under CIS must report them on their Self Assessment tax return. The deductions are treated as advance payments of tax, reducing the final liability or generating a refund. Keep all CIS25 statements from contractors for at least 22 months after the tax year end. If you have GPS and receive gross payments, you must still file a Self Assessment return and pay any tax due. Subcontractors who mistakenly receive gross payments when they should have had deductions are responsible for the shortfall.

Penalties and Compliance

HMRC actively enforces the CIS. Late filing of the monthly CIS300 return incurs automatic penalties from £100 to £400 per month depending on the number of subcontractors. Incorrect returns can attract penalties of up to £3,000 per incorrect return. Contractors who fail to register for CIS, fail to verify subcontractors, or make incorrect verification requests can also be penalised. Subcontractors who make false statements to obtain GPS can be removed from the scheme and face tax-geared penalties. Reverse charge VAT applies to most construction services from 1 March 2021 — the customer accounts for the VAT rather than the supplier.

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