The Construction Industry Scheme, explained.

Who CIS applies to

CIS applies to construction work done in the UK. The definition is broad - it covers most building, civil engineering, and decorating work. It does NOT cover architecture, surveying (in most cases), carpet fitting, plumbing pure-installation work in some narrow contexts, or scaffolding hire without erection.

If you're unsure, the test is: would HMRC consider this 'construction operations' under section 74 of the Finance Act 2004? When in doubt, register.

Step 1: Register for CIS

1. If you're a contractor (paying subcontractors): register as a contractor with HMRC. You'll need to start filing monthly CIS returns from the next month onwards.
2. If you're a subcontractor (paid by contractors): register as a subcontractor with HMRC. Your registered status drops your deduction rate from 30% to 20%.
3. If you're both (a 'mainstream contractor' who also subcontracts on bigger jobs): register for both.

Step 2: How payments and deductions work

• Materials are not subject to CIS deduction - the contractor pays the materials cost in full to the subcontractor.
• Labour is subject to CIS deduction at 20% (registered subcontractor), 30% (unregistered), or 0% (gross payment status holders).
• The contractor must verify the subcontractor's status with HMRC before paying. HMRC returns the correct deduction rate.
• The contractor issues a payment and deduction statement to the subcontractor each pay run.

Step 3: Monthly returns (contractors)

1. By the 19th of each month, the contractor files a CIS return covering the previous month's payments to subcontractors.
2. The return lists every subcontractor paid, the gross amount, materials cost, labour cost, and deduction.
3. The deductions are paid to HMRC by the 22nd of each month (electronic).
4. Late filing triggers automatic penalties: £100 (1 day late), £200 (2 months), £300 or 5% of deductions (6 months), more after 12 months.

Step 4: Self Assessment (subcontractors)

1. The subcontractor files an annual Self Assessment showing turnover and expenses.
2. The CIS deductions paid throughout the year count as advance payments toward the tax bill.
3. If deductions exceed final tax, HMRC issues a refund. If less, the subcontractor pays the balance.
4. For sole trader subcontractors, refunds are common because expenses, personal allowance, and Class 4 NIC structure usually result in less actual tax than 20% of turnover.