Under the Construction Industry Scheme, a contractor deducts 20% from a registered subcontractor's payment and 30% from an unregistered one, then passes that money to HMRC as an advance towards the subcontractor's tax and National Insurance [1]. A business that is not itself in construction can still be pulled into the scheme once it spends more than £3 million on construction in a rolling 12 month period [4]. Those two numbers explain most of what people mean when they talk about "CIS tax".
CIS is not a separate tax in the way that PAYE, National Insurance or VAT are separate taxes. It is a deduction and reporting regime that changes how payments for construction work move between businesses. The label "CIS tax" is shorthand for the amount a contractor holds back from a subcontractor and sends to HMRC on that subcontractor's behalf.
This guide sets out what the scheme is, who counts as a contractor and who counts as a subcontractor, the three deduction rates and how they are worked out, the monthly reporting a contractor must complete, and how a subcontractor recovers the money that has been withheld. It is written for construction SMEs, sole traders, and the accountants and platforms that run payroll for them.
Key takeaways
- CIS is a deduction scheme, not a standalone tax: contractors withhold money from subcontractors and pay it to HMRC as an advance against the subcontractor's own tax bill.
- The three rates are 20% for registered subcontractors, 30% for unregistered or unmatched ones, and 0% for those holding gross payment status.
- The deduction applies only to the labour element of an invoice, never to the direct cost of materials.
- Contractors must file a monthly CIS300 return by the 19th of each month, with a £100 penalty the day it is late.
- A subcontractor reclaims CIS through self assessment (sole traders) or by offsetting against PAYE via the Employer Payment Summary (limited companies).
CIS tax is a deduction, not a new tax
The Construction Industry Scheme sets out the rules for how payments from contractors to subcontractors for construction work must be handled [2]. Rather than paying a subcontractor's invoice in full and leaving that subcontractor to settle its own tax later, the contractor takes a slice of the payment upfront and routes it straight to HMRC. The subcontractor still receives credit for that money; it simply arrives at HMRC sooner.
The deduction as an advance payment
Every CIS deduction counts as an advance payment towards the subcontractor's tax and National Insurance [1]. It is not an extra cost. A registered subcontractor who has 20% withheld across a year has effectively paid tax in instalments, and that credit is set against the final liability when the subcontractor files its return [10]. Where the deductions exceed the eventual bill, the difference is refunded.
The scheme therefore shifts the timing of tax, not the amount owed. A subcontractor whose real tax rate works out below 20% will usually be due a repayment, which is why cash flow, rather than the headline percentage, is the practical concern for most subcontractors [10].
Why the scheme exists
HMRC introduced CIS to reduce tax evasion in an industry with a large, mobile, self-employed workforce. By making the payer responsible for withholding tax, the scheme collects revenue at the point of payment rather than relying on thousands of individual subcontractors to declare their income accurately [13]. The verification step, where a contractor checks a subcontractor's status with HMRC before paying, is the mechanism that ties each deduction to a known taxpayer record [5].
Construction businesses that run both PAYE for employees and CIS for subcontractors sit at the centre of this design. A firm can be an employer, a contractor and a subcontractor at once, which is why understanding the boundaries matters. Many construction SMEs handle this dual reality with dedicated payroll software for construction that keeps the two regimes separate but reconciled.
Who the scheme covers
CIS applies to two roles, contractor and subcontractor, and the same business can hold both at the same time [6]. Getting the classification right is the first compliance step, because it determines who must register, who must deduct, and who must report.
Contractors: mainstream and deemed
A contractor is any business that pays subcontractors for construction work. HMRC recognises two categories, set out in the table below [4].
| Contractor type | Definition | Registration |
|---|---|---|
| Mainstream contractor | A construction business that pays subcontractors for construction work | Must register before taking on the first subcontractor |
| Deemed contractor | A business outside construction that spends more than £3 million on construction in the 12 months from its first payment | Must register once the threshold is crossed |
Mainstream contractors are the obvious case: building firms, groundworkers, roofing companies and the like [14]. Deemed contractors are less obvious and catch out large organisations that would never describe themselves as builders. Government departments, local authorities, housing associations, retailers and property investors can all become deemed contractors once their construction spend passes £3 million [4].
Subcontractors
A subcontractor is a business that carries out construction work for a contractor [6]. Subcontractors are not legally required to register for CIS, but the cost of not registering is immediate: a contractor must deduct 30% from an unregistered subcontractor rather than 20% [7]. Registration is free and, for most subcontractors, removes ten percentage points from every payment withheld.
Subcontractors range from a single self-employed tradesperson to a limited company employing its own workforce. The scheme treats them by their tax status, not their size, so a one-person business and a large subcontracting firm follow the same rate rules [13]. Sole-trader subcontractors can find guidance tailored to their situation on the Moonworkers payroll for sole traders pages.
Businesses that are both
Many construction businesses pay other firms for work while being paid by others in turn. When acting as a contractor, the business follows the contractor rules; when acting as a subcontractor, it follows the subcontractor rules [6]. The two roles run in parallel and are reconciled separately, which is where the offset mechanism described later becomes important [11].
This dual status is the norm rather than the exception in the sector. A mid-sized contractor might deduct CIS from ten subcontractors while having CIS deducted from its own invoices by the main contractor above it [2].
The three deduction rates
The rate a contractor applies depends entirely on the subcontractor's status with HMRC, confirmed through verification before the first payment [3]. The three possible rates are set out below.
| Rate | Applies to | How it is triggered |
|---|---|---|
| 20% | Registered subcontractors paid under deduction | The standard rate for a verified, registered subcontractor |
| 30% | Unregistered or unmatched subcontractors | Applied when the subcontractor is not registered or cannot be matched on verification |
| 0% | Subcontractors with gross payment status | The subcontractor is paid in full and settles all tax later |
The standard 20% rate covers the majority of subcontractors [3]. The 30% rate is a penalty in practice: it applies to subcontractors HMRC cannot identify, so registering and being verified correctly is the simplest way to avoid it [5]. Gross payment status removes deductions entirely and is covered in a dedicated guide on CIS gross payment status.
The deduction applies to labour, not materials
A crucial detail is that CIS is never applied to the whole invoice. The deduction is taken only from the part of a payment that does not represent the direct cost of materials the subcontractor has incurred [2]. Materials are stripped out first, and the percentage is applied to what remains, which is broadly the labour element [1].
Consider a registered subcontractor invoicing £2,000, of which £500 is genuine materials. The contractor deducts 20% of £1,500, which is £300, and pays the subcontractor £1,700 [5]. The £500 of materials passes through untouched. Overstating materials to reduce the deduction is a common error that HMRC scrutinises, because the materials figure must reflect actual cost, not a rounded estimate [2].
Verification sets the rate
Before paying a new subcontractor, the contractor verifies them with HMRC, which returns the rate to apply and a verification reference [5]. Verification is what separates a 20% subcontractor from a 30% one: an unmatched result forces the higher rate [3]. HMRC pre-populates the contractor's monthly return with subcontractors paid or verified in the previous three months, so verification also feeds the reporting cycle [8].
What work is and is not covered
CIS covers most construction operations carried out in the UK, and the definition is deliberately broad [2]. It includes site preparation, demolition, building work, alterations, repairs, decorating and the installation of systems such as heating, lighting, power, water and ventilation [13].
Certain work sits outside the scheme even when it happens on a construction site. Professional work by architects and surveyors, the manufacture of materials off site, carpet fitting, scaffolding hire without labour, and the delivery of materials are examples HMRC lists as outside CIS [2]. The distinction matters because a payment for excluded work does not attract a deduction, and treating it as if it did creates reconciliation problems for both sides [13].
What a contractor must do each month
Being a contractor is an ongoing reporting obligation, not a one-off registration. The core duty is the monthly return, supported by verification, deduction and record keeping [2].
The monthly CIS300 return
Contractors must send a monthly return to HMRC by the 19th of every month, covering the tax month that runs from the 6th of the previous month to the 5th of the current one [8]. The return lists every subcontractor paid, the gross amount, the materials element and the deduction taken [2]. If no subcontractors were paid in a given month, the contractor must still submit a nil return to confirm the position [8].
The deductions themselves are paid to HMRC on the same PAYE payment cycle, due by the 22nd of the month if paying electronically [2]. Accountants managing several construction clients often centralise this through a multi-client payroll dashboard so that CIS300 deadlines are tracked alongside PAYE.
Late filing penalties
Missing the 19th triggers an automatic penalty that escalates the longer the return is outstanding [9]. The structure is set out below.
| Delay after the deadline | Penalty |
|---|---|
| 1 day late | £100 |
| 2 months late | £200 |
| 6 months late | £300 or 5% of the deductions, whichever is greater |
| 12 months late | A further £300 or 5%, rising to as much as 100% for deliberate withholding |
The penalties apply per return, so a contractor who misses several months quickly accumulates charges [9]. HMRC will not charge a penalty where the contractor had a reasonable excuse and filed without unreasonable delay once it ended [9].
Subcontractor payment and deduction statements
Every time a contractor makes a deduction, it must give the subcontractor a payment and deduction statement within 14 days of the end of the tax month [2]. The statement shows the gross payment, the cost of materials and the amount deducted, and it is the subcontractor's evidence when reclaiming the tax later [10]. A subcontractor that loses these statements can struggle to prove its deductions, so both sides have a strong interest in issuing and keeping them [5].
How a subcontractor recovers CIS deductions
Because CIS is an advance payment, the withheld money returns to the subcontractor through its normal tax reporting. The route differs for sole traders and limited companies [10].
Sole traders and partnerships
A self-employed subcontractor accounts for CIS through self assessment. The deductions taken across the year are set against the income tax and Class 4 National Insurance due on the self-assessment return, and any excess is refunded [10]. Because the standard 20% deduction often exceeds a sole trader's real liability once the personal allowance and expenses are applied, many subcontractors receive a repayment after filing [10]. The payment and deduction statements from each contractor are the supporting evidence for the figures entered [2].
Limited companies
A limited-company subcontractor cannot claim CIS deductions through corporation tax directly. Instead it offsets the deductions suffered against the PAYE, National Insurance, student loan and CIS amounts the company owes as an employer, reporting the figure each month on its Employer Payment Summary [11]. Where the deductions suffered exceed the company's own liabilities, the surplus is carried forward within the same tax year, and any remaining balance can be reclaimed after the year end [11].
This monthly offset is one of the trickier reconciliations in construction payroll, because it links the company's subcontractor income to its employer duties [11]. An HMRC-recognised payroll API that reports the EPS automatically keeps the CIS suffered figure aligned with the PAYE liability without manual re-keying.
CIS and the VAT reverse charge
CIS sits alongside the VAT domestic reverse charge for building and construction services, and the two schemes overlap heavily [12]. Broadly, supplies that fall within CIS also fall within the reverse charge, so a construction business managing CIS deductions usually has to manage the reverse charge on the same invoices [12].
Under the reverse charge, the customer accounts for the VAT rather than the supplier, which changes the cash flow on VAT-registered construction transactions [12]. The interaction is a frequent source of confusion because the CIS deduction and the reverse charge are calculated on different bases: CIS excludes materials, while the reverse charge applies to labour and related materials together [12]. Businesses new to either scheme benefit from mapping both against a single invoice before their first payrun.
How payroll software handles CIS
CIS adds a second compliance layer on top of standard payroll, and running it by hand is error-prone once a contractor deals with more than a handful of subcontractors [2]. Verification, deduction, monthly returns, subcontractor statements and the EPS offset all have to reconcile, and a mistake in one flows through to the others [8].
Software that treats CIS as a native part of the payroll engine, rather than a bolt-on, calculates the right rate after materials, files the CIS300, issues statements and reflects deductions in the EPS from a single record. Moonworkers exposes this as part of its HMRC-recognised payroll software for SMEs, so a construction business can run PAYE for its employees and CIS for its subcontractors on the same platform. For platforms building their own construction tooling, the same logic is available through the Moonworkers REST API for UK payroll.
Conclusion
CIS tax is best understood as a timing mechanism rather than an extra charge. The scheme moves a subcontractor's tax forward to the point of payment, with the contractor acting as collector, and the whole system rests on three rates, one monthly return and a set of statements that let each subcontractor prove what has been withheld. For a registered subcontractor, the 20% deduction is money already paid, recoverable in full where the real liability is lower.
The direction of travel in construction is towards tighter integration between CIS, PAYE and VAT, all three of which increasingly touch the same invoice. A business that keeps its verification current, files the CIS300 on time and reconciles its deductions monthly avoids the penalties and the cash-flow surprises that catch out firms treating CIS as an afterthought. The construction sector's next compliance gains will come from joining these systems together, not running them in isolation.
Frequently asked questions
Is CIS tax an extra tax on subcontractors?
No. A CIS deduction is an advance payment towards the subcontractor's own income tax and National Insurance, not an additional charge. The subcontractor receives full credit for the amount withheld when it files its self assessment or offsets it through PAYE, and any overpayment is refunded. In practice, registered subcontractors often get a repayment because the 20% deduction exceeds their eventual liability.
Do I pay CIS on materials as well as labour?
No. The deduction applies only to the part of a payment that is not the direct cost of materials. The contractor removes the genuine materials cost first and then applies 20% or 30% to what remains, which is broadly the labour element. The materials figure must reflect actual cost, because overstating it to reduce the deduction is something HMRC checks.
What happens if a subcontractor is not registered for CIS?
An unregistered subcontractor is not breaking the law, but the contractor must deduct 30% from its payments instead of 20%. Registration is free and, once the subcontractor is verified, drops the rate to 20%. The extra ten percentage points are still recoverable later, but they tie up more cash in the meantime, so registering is almost always worthwhile.
When is the CIS monthly return due?
The CIS300 return is due by the 19th of each month and covers the tax month running from the 6th of the previous month to the 5th of the current one. A return that is even one day late attracts a £100 penalty, rising to £200 after two months. If no subcontractors were paid, the contractor must still file a nil return.
