What Does CIS Mean in Tax? Rates, Deductions, and Refunds

In UK tax, CIS stands for the Construction Industry Scheme, a framework run by HM Revenue and Customs that makes contractors withhold tax from payments to subcontractors doing construction work. The withheld amount, normally 20% or 30% of the labour part of each payment, goes to HMRC and counts as an advance payment toward the subcontractor’s income tax and National Insurance.¹ At the end of the tax year, subcontractors reconcile those deductions against their actual tax bill through Self Assessment, and any overpayment comes back as a refund.

The scheme exists because construction has historically been prone to tax losses through cash payments and a mobile workforce. Putting the collection duty on the contractor gets the money to HMRC before it can go missing.

Who the Scheme Applies To

A contractor under CIS is any business that pays subcontractors for construction work. That obviously covers building firms, but it also catches organisations outside the trade. Any business that spends an average of £3 million or more a year on construction is a “deemed contractor” and has to operate the scheme.² A supermarket chain refitting stores or a council building schools can be pulled in on that basis alone.

A subcontractor is anyone who does construction work for a contractor without being their employee. Registration isn’t compulsory for subcontractors, but staying unregistered means a 30% deduction instead of 20%.³ Contractors, by contrast, must register before they pay anyone, and there is no minimum spending threshold that lets them out.

What Work Falls Inside and Outside CIS

The scheme covers physical construction work done in the UK: building, altering, and repairing structures; installing heating, lighting, ventilation, plumbing, and electrical systems; and demolition or site clearance. Civil engineering such as roads, bridges, railways, pipelines, and harbours is also in scope.⁴ Interior cleaning counts only when it happens during construction, alteration, or repair, not routine cleaning of an occupied building.

Several things sit outside the scheme, and they matter because people often assume they’re covered. Architecture, surveying, and consultancy on building or engineering projects are professional services, not site work, and fall outside CIS. So do off-site manufacturing of components, delivering materials, and standalone scaffolding hire. The rough test is whether the work happens on site and changes the building or land itself.

The Three Deduction Rates

Which rate applies depends entirely on the subcontractor’s status with HMRC.³

20% for subcontractors registered with HMRC. This is the standard rate and the one most subcontractors sit on.
30% for anyone who has not registered. The higher rate is a deliberate nudge into the system.
0% for subcontractors with gross payment status. They receive the full payment and settle their own tax and National Insurance later.

Before a contractor pays a new subcontractor, they must verify them with HMRC. Verification confirms whether the subcontractor is registered and which rate to apply.⁵ If the details a contractor submits don’t match HMRC’s records exactly, verification fails and the 30% rate applies by default, which is a common reason for subcontractors to see too much withheld on early invoices.

Why Materials and VAT Come Out First

CIS deductions only apply to the labour portion of a payment. The cost of materials the subcontractor bought for the job has to be stripped out before the deduction is calculated.⁴ Materials for this purpose include building materials, consumable stores, fuel used on site (not travel fuel), and third-party plant hire. Plant the subcontractor owns doesn’t qualify, though consumables like fuel for it still do.

VAT is also excluded from the calculation. On a £10,000 invoice showing £6,000 labour, £3,000 materials, and £1,000 VAT, the deduction is worked out on the £6,000 labour figure alone. Contractors should ask for evidence of materials costs and keep it, because if HMRC decides the materials element was inflated, the contractor can be held liable for the tax that should have been withheld.

Gross Payment Status

Gross payment status is how established subcontractors avoid having anything withheld at all. Qualifying means passing three HMRC tests: a business test, a turnover test, and a compliance test.⁶

The turnover test looks at net construction turnover over the previous 12 months, excluding VAT and materials. The thresholds are £30,000 for a sole trader, £30,000 per partner or £100,000 for the whole partnership, and £30,000 per director or £100,000 for the whole company. The compliance test checks that tax returns have been filed on time and liabilities paid without significant delay; a single missed Self Assessment deadline can be enough to fail. HMRC reviews the status annually. Lose it and you drop back to 20% deductions, usually with a wait of about a year before you can reapply.

How Subcontractors Get the Money Back

This is the part that catches subcontractors out. CIS deductions are advances, not a final tax charge. At year end, the subcontractor files a Self Assessment return declaring their full income and business expenses, enters the total CIS deducted during the year, and HMRC compares the deductions to the actual tax and National Insurance owed.⁷ If more has been withheld than owed, HMRC pays the difference back.

Refunds happen more often than people expect, especially for subcontractors with sizeable materials costs, van and tool expenses, or thinner profit margins. Skip the Self Assessment return and you lose the refund entirely. Limited companies work differently: they offset their CIS deductions against their PAYE, National Insurance, and student loan liabilities through their employer payment summary rather than reclaiming through Self Assessment.

To claim, subcontractors need the payment and deduction statements contractors are required to issue. Every time a contractor withholds CIS, they must give the subcontractor a written statement within 14 days of the end of the tax month, showing the gross payment, materials cost, deduction, and net paid.³ Keep every one. They are the evidence tax has already been paid on your behalf.

What Contractors Have to Do Each Month

Contractors file a monthly CIS return with HMRC listing every subcontractor paid, the gross amount, materials, and deductions withheld. The tax month runs from the 6th of one month to the 5th of the next, and the return must reach HMRC by the 19th of the following month.⁸ A nil return is required even in months with no subcontractor payments, and missing one carries the same penalty as missing a return with deductions on it.

Late returns attract fixed penalties that start at £100 the day after the deadline and escalate at two months, six months, and twelve months late, with the later penalties calculated as the higher of a fixed amount or a percentage of the deductions on the return. Beyond twelve months, HMRC can add a further penalty of up to £3,000 or 100% of the deductions on the return.⁸ Penalties apply per return, so several missed months stack quickly. Persistent failures can also cost a contractor its own gross payment status if it holds one.⁹

CIS and the VAT Domestic Reverse Charge

Since March 2021, most construction services reported under CIS are also caught by the VAT domestic reverse charge. Under the reverse charge, the customer accounts for the VAT on their own return rather than the subcontractor charging it in the usual way.¹⁰ It applies where both parties are VAT-registered (or required to be) and the payment is for services that fall under CIS reporting.

For subcontractors, that means invoices for qualifying work no longer show VAT as a separate charge to the contractor. The invoice states that the reverse charge applies, and the contractor handles the VAT. End users and intermediary suppliers at the end of the chain are excluded. VAT-registered subcontractors can still reclaim input VAT on their own purchases as normal, but they no longer collect VAT from contractors, which tightens cash flow.