Construction Industry Scheme (CIS) 2026/27

How CIS Works

The Construction Industry Scheme requires contractors to deduct tax from payments they make to subcontractors for construction work. A contractor is any business that pays subcontractors for construction work, if the business spends more than £3 million on construction operations in a 12-month period, or if the business is a developer or property company that carries out construction work. A subcontractor is any individual, partnership, or company that performs construction work for a contractor. When a contractor pays a subcontractor, they must deduct tax at: 20% if the subcontractor is registered with HMRC under CIS, or 30% if the subcontractor is not registered (and cannot provide a valid UTR or NI number). The contractor must give the subcontractor a payment and deduction statement (CIS25) showing the gross payment, the amount deducted, and the net payment. The deducted tax is paid to HMRC by the 19th of the month following the month of payment (or by the 22nd if paying electronically). Contractors can reclaim the deducted tax as a credit against their own tax liabilities. Subcontractors use the deductions shown on their CIS25 statements as a credit against their own Income Tax and National Insurance. If the deductions exceed the subcontractor's tax liability, they can claim a refund from HMRC.

CIS Registration and Verification

Before making a payment to a new subcontractor, the contractor must verify the subcontractor with HMRC. Verification confirms the subcontractor's UTR (Unique Taxpayer Reference) or National Insurance number and tells the contractor whether to deduct 20%, 30%, or no tax (if the subcontractor has gross payment status). Verification can be done online through HMRC's CIS online service or by phone. The contractor must verify the subcontractor before making the first payment and must verify again if the subcontractor's status changes. To register as a subcontractor under CIS, you must: register with HMRC for Self Assessment (if not already registered), apply for CIS registration online or by phone, and provide your UTR and National Insurance number (for individuals) or company registration number (for companies). Once registered, HMRC will issue a CIS registration card or letter confirming your status. You must register for CIS even if you are already registered for Self Assessment. Registration is free and there is no deadline — you can register at any time, but you should do so before starting work so that the contractor can verify your status and deduct the correct rate. If you do not register, the contractor must deduct 30% from all payments, which can cause cash flow issues as you will need to claim the over-deducted tax back from HMRC through your Self Assessment return.

Gross Payment Status

Subcontractors who have a good compliance history can apply for gross payment status (also known as gross payment or no deduction). If granted, the contractor pays the subcontractor the full amount of the invoice without deducting any CIS tax. The subcontractor is responsible for paying their own Income Tax and National Insurance through Self Assessment. To qualify for gross payment status, the subcontractor must meet all of the following conditions: business test — the business must be carried on in the UK with a bank account and proper business premises; turnover test — the business must have a turnover of at least £30,000 per year (£30,000 for sole traders, £30,000 for partnerships, £30,000 per director for companies); compliance test — the business must have filed all tax returns on time and paid all tax due for the qualifying period (usually the previous 12 months). Gross payment status can be granted for up to 2 years initially, then reviewed. If you have gross payment status and fail to meet the conditions, HMRC can withdraw it, and you will revert to receiving payments with 20% or 30% deduction. Gross payment status is valuable for cash flow because you receive the full invoiced amount and pay tax in arrears through Self Assessment rather than having it deducted upfront. It also demonstrates to contractors that you have a good tax compliance record. The application for gross payment status is made through the CIS online service or by completing form CIS303.

Monthly Returns and Reporting

Contractors must submit a CIS monthly return (form CIS300) to HMRC within 14 days of the end of each tax month (the 5th to the 5th of each month). The return lists all subcontractors paid during the month, their UTRs, the gross amounts paid, and the CIS tax deducted. Contractors can submit the return online through HMRC's CIS online service. Late filing penalties for CIS returns start at £100 per return for up to 2 months late, rising to £200 for 2–6 months late, and then up to £300 or 5% of the CIS deductions for longer delays. Contractors who fail to file returns for 12 months face penalties of up to £3,000 per return if HMRC considers the failure as deliberate and concealed. In addition to the monthly return, contractors must provide each subcontractor with a CIS25 payment and deduction statement showing the gross payment, deductions, and net amount paid. The annual CIS36 statement summarising all payments and deductions for the year must be provided to each subcontractor by 19 May following the end of the tax year. Contractors must keep records of all CIS payments and deductions for at least 6 years. If you use CIS-compliant accounting software, the monthly returns and subcontractor statements can be generated automatically, saving time and reducing errors. The transition to Making Tax Digital (MTD) for income tax will also affect CIS reporting, with digital record-keeping becoming mandatory for businesses with income over £50,000 from April 2026.

CIS Penalties and Compliance

HMRC takes CIS compliance seriously and imposes significant penalties for non-compliance. Common CIS penalties include: late filing of CIS returns — £100 per return for up to 2 months late, increasing to £200 for 2–6 months, and then penalties up to £3,000 per return for extended delays; late payment of CIS deductions — interest at HMRC's late payment rate (currently 7.25%) plus penalties of up to 5% of the amount due; failure to verify a subcontractor — if you pay a new subcontractor without verifying them first, you could be liable for any tax that should have been deducted; failure to keep records — HMRC can charge penalties of up to £3,000 for inadequate record-keeping. HMRC also conducts compliance reviews and can visit contractors to inspect their CIS records. If HMRC finds serious non-compliance, they can impose penalties, issue surcharges, and in extreme cases, pursue criminal prosecution for fraud. Subcontractors who fail to register for CIS or fail to declare CIS income on their Self Assessment return can face penalties for non-compliance, including up to 100% of the tax underpaid in cases of deliberate error. The best approach to CIS compliance is to: register promptly, use CIS-compliant software, file returns on time, pay deductions on time, keep accurate records, and seek professional advice if you are unsure about any aspect of the scheme. For property developers and construction companies, engaging a specialist CIS accountant can save significant time and money in penalties avoided.

FAQs

What is the difference between 20% and 30% CIS deduction?

The 20% rate applies to registered subcontractors who have provided their UTR to the contractor. The 30% rate applies to unregistered subcontractors who have not registered for CIS. Registration is free and straightforward.

How do I apply for gross payment status?

Apply through the CIS online service or complete form CIS303. You must meet the business test, turnover test (£30,000 or more), and compliance test (all tax returns and payments up to date).

Can I reclaim CIS deductions?

Yes. CIS deductions are treated as advance payments of Income Tax and National Insurance. When you file your Self Assessment return, the deductions are credited against your total tax liability. If deductions exceed your liability, you can claim a refund.

What construction work is covered by CIS?

CIS covers most construction work including building, repairs, alterations, demolition, site preparation, civil engineering, scaffolding, and decorating. It does not cover professional fees (architects, surveyors) or materials manufacturing.