The Construction Industry Scheme (CIS) – what you need to know

The Construction Industry Scheme typically covers:

• Permanent building 
• Temporary structure 
• Civil engineering work 

The scheme facilitates CIS deductions by arranging for contractors to deduct tax directly from subcontractors’ payments. Contractors subsequently pay the tax to HM Revenue & Customs (HMRC) on the subcontractors’ behalf. 

Who must register for CIS? 

If you are a contractor, you must register for CIS before hiring your first subcontractor. Contractors can be sole traders, partnerships, or limited companies. 

• A contractor hires subcontractors for contract work. If your business is in construction and you pay subcontractors for construction work, you are a mainstream contractor. 
• If you do not run a construction business but have spent over £3 million on construction in a 12-month period, you are considered a deemed contractor. 

As a subcontractor, you do not need to register for CIS, but registering may benefit you. 

7 steps of the CIS process for a contractor  

1. Employment Status 

Check if contracts create employment or self-employment. If you are a contractor, you are responsible for checking employment status and can use the CEST tool to help with this. If you use this tool, keep a record of the findings to support your decision. If the contract indicates employment, you must employ the person instead of subcontracting the work. 

In a chain, it is important to consider all the roles. For example, if Alison is a contractor and hires Brendan for brickwork, Brendan is a subcontractor. If Brendan then asks Chris to do some carpentry, Chris is a subcontractor. Brendan becomes both a contractor and a subcontractor. 

2. Register with HMRC 

Register as a contractor with HMRC before hiring a subcontractor. You can register as a contractor online. 

To register, you will need: 

• Your Unique Tax Reference (UTR) 
• Your National Insurance (NI) number 
• Business name 
• Contact information 

Once registered, you will receive an employer reference and accounts office reference to use when making payments. Your business tax account allows you to see all business tax in one place; you may need to add the CIS service. You can file CIS returns using your business tax account. 

3. Verify subcontractors with HMRC 

When you hire subcontractors, you must verify them with HMRC to ensure that you use the correct tax deduction rate. To verify a subcontractor, you will need: 

• Subcontractor’s name 
• Subcontractor’s UTR 
• Subcontractor’s NI number 
• Subcontractor’s company registration number (if trading as a company) 

Obtain this information as soon as possible to avoid the subcontractor paying a higher rate than necessary. If a subcontractor changes their business name or structure, you must verify them again. HMRC will provide you with a verification reference number and confirm the deduction rate. Keep a record of this for your monthly CIS return. 

4. Pay subcontractors and make deductions 

The rates of deduction are: 

• No deduction (subcontractor has applied to receive gross payments) 
• 20% (standard rate) 
• 30% (higher rate as the subcontractor has not registered for CIS) 

If you have worked with a subcontractor before and included them on a CIS return in the current or previous two tax years, you will not need to verify them again.  

HMRC will notify you of any changes to the deduction rate. If the change is from gross to 20%, you have 35 days’ notice. If the change is from 20% or 30% to gross, you should use this as soon as possible. 

When a subcontractor buys items that the contractor will reimburse, the deduction is based on the payment excluding those costs. 

Example

Chris is not registered for VAT, and his deduction rate is 20%. Brendan (contractor) has agreed to repay materials. 

Labour	£600
Materials	£240
Total	£840
Less: VAT charged	£0
Less: Materials, fuel, plant hire	£240
Balance before deduction	£600
Deduction (20%)	£120
Net amount	£480

Chris received £720 (£240 for materials and the net amount of £480). The deduction of £3,120 is paid straight to HMRC by the Brendan. 

5. Give subcontractors a deduction statement 

Contractors must give a payment and deduction statement by the 19th of each month. Contractors can issue statements monthly or for each payment if more frequent. 

6. Send any deductions and monthly return to HMRC 

CIS returns 

Contractors must send a CIS return to HMRC by the 19th of each month. You can send the return online using the CIS online service or commercial software.  

For every subcontractor, a CIS return must include: 

• Name or trading name 
• Amount paid before deduction 
• Cost of materials paid for by subcontractors 
• Deduction made 

The CIS return includes two declarations to complete: 

• Subcontractors are self-employed 
• Verification of subcontractor has been made where necessary 

If you miss the deadline, penalties will be applied, starting from: 

• £100 for being one day late 
• a further £200 when two months late 
• an additional £300 or 5% of CIS deductions at six and 12 months

For returns later than 12 months, you may be given an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher.  

HMRC will cancel the penalty if you let it know that you did not pay any subcontractors that month. 

Paying deductions to HMRC 

Deductions from subcontractors must be paid to HMRC by: 

• 22nd of each month when paying electronically 
• 19th of each month when paying by cheque 

You should pay the correct amount even if you calculated the deduction wrong. If you have PAYE employees too you can include PAYE/NI and CIS deductions in same payment. 

If no payment is required, you must tell HMRC. If no return is due, you must tell HMRC by sending a nil return or calling the CIS helpline. If you have not used any subcontractors for a while, you can let HMRC know by ticking the inactivity box under the declaration section of the CIS return. HMRC will stop asking for monthly CIS returns (for six months). 

7. Keep records 

You must keep detailed records of information contained on CIS returns and how you reached the figures. These should be readily available if HMRC asks, and you should keep these for at least three years. This includes: 

• Gross amount 
• Deductions 
• Cost of materials paid by the subcontractor 

HMRC can charge penalties if records are not adequate, or you destroy records too soon. 

 

Date published 14 Oct 2024 | Last updated 14 Oct 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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