The UK construction industry relies on contractors and subcontractors to complete projects ranging from home renovations to large commercial developments. Managing payments correctly is an important part of running a construction business, particularly when it comes to tax responsibilities.
The Construction Industry Scheme (CIS) is a tax scheme operated by HM Revenue and Customs (HMRC). It sets out how contractors must handle payments to subcontractors for qualifying construction work. Understanding the scheme helps contractors maintain accurate records, make the correct deductions and meet their HMRC obligations.
In this guide, we explain how the Construction Industry Scheme works, who needs to register, how deductions are calculated and what contractors must do to remain compliant.
What Is the Construction Industry Scheme?
The Construction Industry Scheme is designed to ensure that tax is collected on payments made to subcontractors carrying out construction work.
Under CIS, contractors usually deduct a percentage from payments to subcontractors and pass those deductions to HMRC. These deductions count as advance payments towards the subcontractor's tax and National Insurance liabilities. The final tax position depends on the subcontractor's circumstances.
The scheme covers many types of construction activities, including building work, alterations, repairs, decorating, demolition and certain civil engineering projects.
The rules can apply to construction businesses and some businesses outside the construction sector that spend substantial amounts on construction work. Contractors should check HMRC guidance to establish whether their activities fall within the scheme.
Who Needs to Register for CIS?
Understanding whether your business is a contractor or subcontractor is an essential first step.
Contractors
A business generally needs to register as a CIS contractor if it pays subcontractors to carry out construction work. Certain businesses that do not normally operate in construction may also need to register if their construction expenditure meets HMRC's specified conditions.
For example, a construction company that hires electricians, plasterers and bricklayers to complete a building project may need to operate CIS when paying those subcontractors.
Contractors are responsible for checking subcontractor details, calculating deductions, submitting monthly returns and paying the relevant amounts to HMRC.
Subcontractors
A subcontractor is a business or individual carrying out construction work for a contractor under the scheme.
Subcontractors can register with HMRC so that contractors can verify their details and apply the correct deduction rate. Subcontractors who do not register may face deductions at the higher rate.
Registering does not remove a subcontractor's responsibility to report income and settle any tax due.
How CIS Deductions Work
One of the main responsibilities of a contractor is applying the correct CIS deduction to qualifying subcontractor payments.
HMRC currently specifies three deduction outcomes:
20%: The standard deduction rate for registered and verified subcontractors.
30%: The higher deduction rate generally applied to subcontractors who are not registered or cannot be verified.
0%: No CIS deduction is made where HMRC has confirmed that the subcontractor has gross payment status.
These deductions are not necessarily the subcontractor's final tax bill. They are advance payments towards tax and National Insurance, and the final position is determined through the relevant tax process.
Contractors must not simply choose a deduction rate themselves. They should verify the subcontractor with HMRC when required and follow the rate or payment instructions provided.
How to Verify a Subcontractor
Before paying a new subcontractor, contractors generally need to verify their details with HMRC.
The verification process helps HMRC establish whether the subcontractor is registered and which deduction rate applies. Contractors may also need to reverify subcontractors who have not appeared on a CIS return during the current or previous two tax years.
To complete verification, contractors may need information such as the subcontractor's legal or trading name, Unique Taxpayer Reference (UTR) and other identifying details, depending on the business structure.
It is important to enter these details accurately. A mismatch between the information supplied and HMRC's records may prevent successful verification and affect the rate applied to a payment.
Verification can be completed through HMRC's online CIS service or compatible commercial software. See the
How to Calculate CIS Deductions Correctly
CIS deductions are generally calculated on the labour and other relevant payment elements after excluding qualifying amounts under the scheme's rules.
For example, if a subcontractor invoices a contractor for labour and materials, the contractor must identify which costs can be excluded from the amount subject to deduction.
Depending on the circumstances, allowable exclusions can include VAT, materials purchased directly by the subcontractor, certain plant hire costs and other specified items.
Contractors should keep evidence of material costs where appropriate, such as invoices or receipts. They should not automatically deduct every amount labelled as a material cost without checking whether it qualifies under HMRC's rules.
Accurate calculations help ensure that subcontractors receive the correct payment and that the contractor reports the correct figures to HMRC.
Monthly CIS Returns and Payment Deadlines
Contractors must submit monthly CIS returns covering payments made to subcontractors during the relevant tax month.
The tax month generally runs from the 6th of one month to the 5th of the following month. Returns must normally reach HMRC by the 19th of the following month.
A return includes details of subcontractors, relevant payments and deductions, along with required declarations concerning verification and employment status.
From 6 April 2026, mainstream contractors must also file a nil return or notify HMRC of a period of inactivity when they have not paid subcontractors, according to the applicable rules.
Contractors must also pay deductions due to HMRC by the relevant deadline. Late returns or payments can lead to penalties and additional administrative work.
Providing Payment and Deduction Statements
When a contractor makes CIS deductions, they must provide the subcontractor with a payment and deduction statement within 14 days of the end of the relevant tax month.
The statement should show the payments made and deductions taken.
These statements are important because subcontractors need them to keep accurate records and report their income and CIS deductions correctly. Contractors should retain their own copies alongside invoices, verification details and payment records.
If a subcontractor believes a statement contains an error, both parties should review the figures and resolve the discrepancy promptly.
Common CIS Mistakes Contractors Should Avoid
CIS compliance can become difficult when a business has multiple subcontractors, frequent payments or incomplete financial records.
Common mistakes include:
Failing to register as a contractor when required.
Paying a new subcontractor without completing the necessary verification.
Applying the wrong deduction rate.
Calculating deductions incorrectly or excluding costs without suitable evidence.
Missing monthly return or payment deadlines.
Providing incorrect payment and deduction statements.
Treating a worker as self-employed without properly considering their employment status.
Contractors should also remember that CIS does not determine whether someone is genuinely self-employed for employment tax purposes. Employment status must be considered separately, and the required declaration must be made accurately on the monthly return.
Using organised bookkeeping procedures and reviewing records regularly can help reduce these risks.
How The Infinity Group Can Support Construction Businesses
Construction businesses often need reliable support to manage payroll, bookkeeping and financial administration alongside their day-to-day projects.
The Infinity Group offers business and financial support for organisations seeking to manage their accounting responsibilities and business processes more effectively. Contractors can visit its website to explore available services and discuss which support may be appropriate for their requirements.
For businesses operating under CIS, maintaining accurate records, understanding deduction requirements and meeting HMRC deadlines should remain priorities. Where a situation is complex, contractors should seek appropriate professional advice.
Find out more about The Infinity Group at https://theinfinitygroups.com/.
Final Thoughts
The Construction Industry Scheme plays an important role in how UK contractors pay subcontractors and manage construction-related tax deductions.
To operate the scheme correctly, contractors should establish whether registration is required, verify subcontractors, apply the correct deduction rates, submit monthly returns and keep complete records. They should also provide payment and deduction statements and meet the relevant HMRC deadlines.
By understanding their responsibilities and putting clear procedures in place, contractors can reduce avoidable errors and manage their construction businesses more confidently.
Always check the latest HMRC guidance for your circumstances, as specific requirements may vary depending on the type of business, payment and construction work involved.
