What Is CIS?
The Construction Industry Scheme (CIS) is a UK government tax framework managed by HMRC. It sets out the rules for how contractors must handle tax deductions when paying subcontractors for construction work.
Under CIS, contractors deduct money from a subcontractor's pay and pass it directly to HMRC. These deductions count as advance payments toward the subcontractor's tax and National Insurance bill — meaning subcontractors pay tax progressively throughout the year rather than in a lump sum at the end.
CIS was introduced to reduce tax evasion in the construction sector, which has historically involved large numbers of self-employed workers and cash-in-hand payments.
Who Does CIS Apply To?
CIS applies to contractors and subcontractors working in construction in the UK.
Contractors under CIS
A contractor is any business or individual that pays subcontractors for construction work. This includes:
- Main contractors on construction projects
- Property developers who spend more than £1 million per year on construction
- Companies in other sectors that regularly commission construction work
Subcontractors under CIS
A subcontractor is any individual or business paid by a contractor to carry out construction work. This includes sole traders, partnerships, and limited companies.
What Counts as Construction Work?
CIS covers a broad range of activities, including:
- Site preparation and groundworks
- Demolition
- Building work — residential and commercial
- Alterations, repairs and maintenance
- Civil engineering (roads, bridges, utilities)
- Decoration and fitting out
- Installing systems: heating, lighting, ventilation, drainage
Work not covered by CIS includes: architecture, surveying, carpet fitting, delivery of materials only, and scaffolding hire (without labour).
CIS Deduction Rates
HMRC applies three deduction rates depending on the subcontractor's registration status:
20% — Standard Rate
For subcontractors who are registered with CIS. This is the most common rate.
30% — Higher Rate
For subcontractors who are not registered with CIS or whose details cannot be verified by HMRC. A strong financial incentive to register.
0% — Gross Payment Status
For subcontractors approved by HMRC to receive payments in full, without deduction. This requires a strong compliance history and a minimum turnover threshold.
How CIS Works in Practice
- Subcontractor registers with HMRC for CIS
- Contractor verifies the subcontractor with HMRC before the first payment
- HMRC confirms the applicable deduction rate (0%, 20% or 30%)
- Contractor pays the subcontractor, deducting the correct percentage from the labour element only
- Contractor submits a monthly CIS return to HMRC
- Contractor provides a payment and deduction statement to the subcontractor
- Subcontractor claims the deductions against their annual tax bill via Self Assessment
CIS and Materials
CIS deductions only apply to the labour element of an invoice, not to the cost of materials. If a subcontractor invoices £3,000 for labour and £1,000 for materials, the 20% deduction applies only to the £3,000 labour portion — a deduction of £600, not £800.
Subcontractors must itemise their invoices clearly, separating labour from materials.
Responsibilities for Contractors
- Registering as a contractor with HMRC before making your first CIS payment
- Verifying every subcontractor with HMRC before paying them for the first time
- Making correct deductions at the rate confirmed by HMRC
- Submitting monthly CIS returns — even if no payments were made that month
- Issuing payment and deduction statements to subcontractors within 14 days of the end of each tax month
- Keeping accurate records of all payments, deductions and verification references
Failure to comply can result in HMRC penalties starting at £100 per month for late returns.
Responsibilities for Subcontractors
- Register with HMRC to benefit from the standard 20% rate rather than 30%
- Apply for Gross Payment Status if eligible
- Keep all payment and deduction statements from contractors
- File a Self Assessment return each year and claim credit for CIS deductions already made
CIS vs PAYE: What's the Difference?
CIS is for self-employed subcontractors. Workers set their own working arrangements and operate across multiple clients.
PAYE is for employed workers. The employer deducts Income Tax and National Insurance at source each pay period.
HMRC applies strict tests to determine genuine self-employment. Misclassifying employed workers as CIS subcontractors — known as false self-employment — is a serious compliance risk that can result in significant back-payments and penalties.
At SILVMARC, we ensure that all labour placements are correctly structured under the appropriate engagement model, protecting both our clients and the workers we supply.
Gross Payment Status: Is It Worth Applying For?
Gross Payment Status (GPS) allows a subcontractor to receive payments without CIS deductions, improving cash flow significantly. To qualify, a subcontractor must:
- Have filed all tax returns on time
- Have paid all tax, NIC and VAT on time
- Have a business bank account
- Meet the minimum turnover threshold (£30,000 for sole traders; higher for companies)
Common CIS Mistakes to Avoid
- Not verifying subcontractors before payment — if unverified, you must deduct 30%
- Deducting from materials — deductions should only apply to the labour element
- Missing the monthly return deadline — CIS returns are due by the 19th of each month
- Paying without registration — contractors must register before making any CIS payments
- Ignoring nil returns — a monthly return is required even if no payments were made
Need Help With CIS-Compliant Labour Supply?
Navigating CIS compliance can be complex, particularly when managing large subcontractor workforces across multiple sites. SILVMARC specialises in providing fully compliant labour supply solutions for contractors and developers in the construction and energy infrastructure sectors.