The Construction Industry Scheme (CIS): A Complete Guide for Subcontractors

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax deduction system that applies to payments made by contractors to subcontractors in the construction industry. Under CIS, contractors deduct money from subcontractor payments and pass it to HMRC as advance tax payments.

If you're a self-employed subcontractor in construction, CIS affects every payment you receive. Understanding how it works is essential to managing your cash flow and ensuring you don't overpay tax.

How CIS Deductions Work

When a contractor pays you for construction work, they must:

1. Verify you with HMRC before making the first payment
2. Apply the correct deduction rate based on your registration status
3. Issue a payment and deduction statement within 14 days of each tax month end
4. Submit a monthly CIS return to HMRC

The Three Deduction Rates

Critical: If you're not registered for CIS, contractors must deduct 30% from your payments. Registration is free and reduces this to 20%. There is no excuse for not registering.

What Gets Deducted?

CIS deductions apply to the labour element of your payment. They do not apply to:

• Materials you've purchased for the job (if separately itemised)
• Equipment hire costs (if separately invoiced)
• VAT (deductions are calculated on the net amount)

Make sure your invoices clearly separate labour from materials - otherwise the contractor may deduct CIS from the entire amount.

How to Register for CIS

Registering as a subcontractor is straightforward:

1. You need a UTR (Unique Taxpayer Reference) - you get this when you register for Self Assessment
2. Call HMRC's CIS helpline (0300 200 3210) or register online via your Government Gateway account
3. Provide your UTR and National Insurance number - these are what contractors use to verify you

Registration is free and there's no downside. The 10% reduction in deductions (30% to 20%) starts immediately.

Getting Gross Payment Status

Gross payment status means contractors pay you the full amount with no CIS deductions. This is a significant cash flow advantage - you keep 100% of each payment and settle your tax bill via Self Assessment instead.

To qualify, you must meet three tests:

1. Business Test

You must be carrying on a business in the UK that includes construction work.

2. Turnover Test

Your construction turnover (excluding materials and VAT) must be at least £30,000 per year. For partnerships, the threshold is £30,000 multiplied by the number of partners.

3. Compliance Test

You must have a good compliance record with HMRC:

• All tax returns filed on time
• All tax payments made on time (or within agreed payment plans)
• No outstanding tax debts

HMRC reviews your gross payment status annually. If you fail the compliance test, they can revoke it - which is a significant cash flow blow.

Pro tip: This is why keeping your Self Assessment up to date is so important for CIS subcontractors. A late tax return doesn't just incur penalties - it can cost you gross payment status.

Reclaiming CIS Deductions

CIS deductions are not a tax - they're advance payments towards your Income Tax and NI liability. When you file your Self Assessment return, these deductions are offset against your tax bill.

Three outcomes are possible:

1. Deductions exceed your tax bill - you get a refund from HMRC
2. Deductions match your tax bill - nothing more to pay
3. Deductions are less than your tax bill - you pay the difference

Many subcontractors are entitled to a refund because CIS deductions at 20% often exceed their actual tax liability once expenses are deducted.

Claiming Your Refund

To reclaim overpaid CIS deductions:

1. File your Self Assessment return (SA100 + SA103)
2. Enter total CIS deductions suffered in the tax year (from your payment and deduction statements)
3. HMRC offsets the deductions against your tax + NI bill
4. If there's a surplus, HMRC issues a refund

TaxMTD tracks your CIS deductions throughout the year via your bank feeds and calculates your net tax position including CIS offsets.

Keeping Your Records Straight

As a CIS subcontractor, you need to keep:

• Payment and deduction statements from every contractor (the contractor must provide these within 14 days of each tax month end)
• Records of all income (gross and net amounts received)
• Records of all business expenses (materials, travel, tools, mileage, etc.)
• Invoices issued to contractors

If a contractor fails to provide a payment and deduction statement, you must request it in writing from HMRC - phone requests are no longer accepted (since July 2024).

Common CIS Expenses

Subcontractors can claim the same allowable expenses as any sole trader, plus some construction-specific ones:

• Tools and equipment (hand tools, power tools, PPE)
• Materials you purchase for jobs
• Travel to sites (at 45p/mile simplified rate)
• Workwear and PPE (safety boots, hard hats, hi-vis)
• Vehicle costs (van lease, insurance - business proportion)
• Professional qualifications (CSCS card, training courses)
• Public liability insurance
• Subcontractor insurance

Tracking these expenses properly can mean the difference between owing HMRC money and getting a refund. TaxMTD's AI categorisation recognises common construction expense patterns.

CIS and Making Tax Digital

From April 2026, subcontractors with qualifying income over £50,000 are subject to Making Tax Digital for Income Tax. This means quarterly digital reporting of income and expenses.

For CIS subcontractors, MTD quarterly updates should include:

• Gross income received
• CIS deductions suffered
• Business expenses

TaxMTD handles MTD quarterly submissions with CIS deductions factored into the tax calculation automatically.

TaxMTD for CIS Subcontractors

TaxMTD is built to handle the complexity of CIS:

• Bank feeds capture net payments after CIS deductions
• CIS tracking reconciles gross payments, deductions, and net receipts
• SA103 generation includes CIS deductions in Box 80
• Tax calculation shows your position after CIS offsets
• MTD compliance for quarterly reporting

The Bottom Line

CIS is unavoidable if you work in construction, but it doesn't have to be painful. Register to get the 20% rate (or apply for gross payment status if you qualify), keep your records straight, claim all your expenses, and file on time to protect your compliance record.

Most CIS subcontractors are entitled to a refund. Make sure you're one of them.

Get started with TaxMTD and let us track your CIS payments automatically.

Further reading: Self Assessment Guide · National Insurance for the Self-Employed · Cash Basis Changes