What CIS actually is
CIS stands for the Construction Industry Scheme. It's an HMRC system that requires contractors to deduct tax from subcontractors' payments before paying them. That's it. The contractor takes a percentage off the top and sends it to HMRC on your behalf.
The key thing most people miss: CIS deductions are not extra tax. They're advance payments of the income tax you'd owe anyway. Think of it like your employer deducting PAYE from a salary, except you're self-employed and it's the contractor doing the deducting.
The contractor is legally required to do this. They don't have a choice. If they pay you gross without deducting CIS (and you're not registered for gross payment status), they're the ones in trouble with HMRC, not you.
Worked example
You invoice a contractor for £1,000 (labour only). The contractor deducts 20% CIS (£200) and pays you £800. That £200 goes straight to HMRC. When you file your tax return at the end of the year, that £200 counts as tax you've already paid. If your total tax bill is £3,000, you only owe HMRC another £2,800.
If you've had more CIS deducted than your actual tax bill, you get the difference back as a refund.
The two deduction rates
There are two CIS deduction rates, and which one applies to you depends on one thing: whether you've registered with HMRC for CIS.
- 20% if you're registered with HMRC as a CIS subcontractor
- 30% if you're not registered
That's a 10% difference on every single payment. On a £5,000 invoice, that's £500 more taken off the top — money you don't see until you file your tax return and claim it back. For some subcontractors, that gap in cash flow is the difference between making wages and not.
Register. It's free. It takes about 10 minutes online through your Government Gateway account. You need your National Insurance number and your UTR (Unique Taxpayer Reference). If you don't have a UTR, you'll need to register for Self Assessment first, which takes a bit longer.
Gross payment status
There's a third option: gross payment status. This means the contractor pays you the full amount with no deductions. But qualifying for it is harder. HMRC requires a clean compliance record, a minimum annual turnover (currently £30,000 for sole traders), and your tax returns and payments need to be up to date. Most small subcontractors won't qualify straight away. If you think you do, talk to your accountant about applying.
What counts as construction work under CIS
CIS covers more than you might think. It's not just bricklaying and pouring concrete. The scheme applies to most work on permanent or semi-permanent structures, including:
- Site preparation and clearance
- Groundworks, foundations, and drainage
- Building work, bricklaying, roofing
- Plastering, painting, decorating
- Joinery, carpentry, shopfitting
- Plumbing, heating, and ventilation
- Electrical work
- Landscaping and fencing (when connected to a building project)
- Demolition
- Installing kitchens and bathrooms
What doesn't count
Some work that looks like construction falls outside CIS. The main exclusions are:
- Carpet fitting and laying floor coverings (unless it's part of a larger construction contract)
- Delivering materials (delivery only, no installation)
- Scaffolding hire without erection
- Surveying and architecture
- Making materials or components off-site (manufacturing, not installing)
The edges can be blurry. If you're doing a job that could sit either side of the line, check before you invoice. Getting the CIS treatment wrong on an invoice creates problems for both you and the contractor.
Not sure if your work falls under CIS?
That's covered in Growth and Full Build — our team walks you through it. But the short version: if you're working on or in a building and you're being paid by a contractor rather than a homeowner, CIS almost certainly applies.
CIS and your tax return
Every CIS deduction a contractor makes from your payments gets reported to HMRC. When you file your Self Assessment tax return (or your company tax return if you trade through a limited company), those deductions count as tax you've already paid.
Here's the problem: HMRC doesn't always match everything up perfectly. If your records don't match what the contractor reported, you could end up paying more tax than you should, or missing out on a refund you're owed.
Keep every CIS payment and deduction statement. Contractors are required to give you a written statement every time they make a payment, showing the gross amount, the deduction, and the net payment. These statements are your proof. Without them, you're relying on HMRC's records being correct — and sometimes they aren't.
Sole traders vs limited companies
If you're a sole trader, CIS deductions are offset against your income tax bill through Self Assessment. If you trade through a limited company, CIS deductions can be offset against your PAYE, NICs, and student loan payments first, and any remaining balance against your corporation tax.
For limited companies, you can also reclaim CIS deductions monthly rather than waiting until your year-end tax return. Your accountant should be handling this — if they're not, ask why.
Track your deductions properly
This is where money goes missing. A subcontractor doing £60,000 of CIS work a year at 20% has £12,000 in deductions. If they lose track of even a few statements, they could miss hundreds in refunds. A spreadsheet or accounting software that logs every CIS payment received is the bare minimum.
CIS and VAT reverse charge
This is where it gets properly confusing, so pay attention. If you're VAT-registered and supplying CIS-qualifying services to another VAT-registered business, you probably need to use the domestic reverse charge for VAT.
What that means in practice: you don't charge VAT on your invoice. Instead, the contractor accounts for the VAT themselves. You still show the VAT amount on the invoice, but you annotate it as "reverse charge" and the contractor handles the VAT payment to HMRC.
When the reverse charge applies
- The supply is CIS-qualifying construction work
- Both you and the contractor are VAT-registered
- The contractor is not an "end user" or "intermediary supplier connected with end users"
When it doesn't apply
- You're working directly for a homeowner or property owner who isn't going to make onward supplies of the building (they're the end user)
- The contractor has told you in writing that they're an end user
- Either party isn't VAT-registered
If you charge VAT when you should have used the reverse charge, HMRC can and will correct you. The contractor can refuse to pay the VAT element of your invoice. Either way, you end up doing the invoice again, chasing amended payments, and wasting time that should have been spent on the tools.
Get your invoices right first time
Your invoice needs to state whether the reverse charge applies. If it does, include the wording "Customer to account for reverse charge output tax" and show the VAT rate and amount but don't add it to the total. If you're using accounting software, there should be a reverse charge option built in. If you're invoicing manually, this is one of those details that's easy to get wrong — and that's covered in Growth and Full Build — our team walks you through it.
Penalties for getting it wrong
HMRC doesn't send gentle reminders. They send penalty notices with numbers on them. Here's what you're looking at if things go wrong:
Not registering for CIS
If you're not registered, contractors must deduct at 30% instead of 20%. That's the penalty built into the system — you lose cash flow on every payment. There's no fine for failing to register as a subcontractor specifically, but the financial hit of 30% deductions instead of 20% adds up fast.
Late CIS returns (for contractors)
If you operate as a contractor and file your monthly CIS returns late, the penalties escalate quickly:
- £100 for each of the first three months late (per return)
- £200 per month for months four and five
- £300 or 5% of the CIS deductions (whichever is higher) at six months
- Another £300 or 5% at twelve months
That's up to £3,000 in penalties on a single late return before the twelve-month mark, plus any additional tax-geared penalties HMRC decide to apply.
Incorrect CIS deductions
If a contractor deducts the wrong amount, or fails to verify your registration status before making a payment, HMRC can recover the shortfall from the contractor — and charge penalties of up to 100% of the under-deduction. As a subcontractor, this doesn't hit you directly, but it can mean your deduction records don't match HMRC's and you end up in a reconciliation headache at year end.
VAT reverse charge mistakes
Charging VAT when you should have used the reverse charge (or vice versa) can result in assessments and penalties. HMRC treats this as an incorrect VAT return. Penalties range from suspended penalties for careless errors to up to 30% of the VAT understatement for careless behaviour, and up to 70% for deliberate errors.
The cost of getting it right is much lower than the cost of getting it wrong
Most CIS problems come from not tracking deductions, not registering, or getting the VAT reverse charge wrong on invoices. All of these are solvable with basic systems and someone who knows what they're doing. That's covered in Growth and Full Build — our team walks you through it.