What Is CIS Tax? Rates, Registration, and Reverse Charge

CIS tax is money withheld under HMRC’s Construction Industry Scheme, where a contractor deducts a percentage from what they pay a subcontractor for construction work and sends it to HMRC as an advance against the subcontractor’s Income Tax and National Insurance. Registered subcontractors have 20% withheld. Unregistered subcontractors lose 30% of each payment.¹ The money isn’t lost. It’s reconciled later, through self assessment for sole traders and partners, or through payroll for limited companies.

Who the Scheme Applies To

CIS splits people into contractors and subcontractors, and you can be both at once. If you hire subcontractors for some jobs and work as a subcontractor on others, you register in both capacities.²

Mainstream contractors are businesses whose core work is construction: building firms, civil engineering companies, and the like. They must register with HMRC and operate CIS on every payment to subcontractors.

Deemed contractors are businesses that don’t do construction as their main activity but spend heavily on it. Once your rolling 12-month construction expenditure crosses £3 million, you become a deemed contractor from that date and must start operating the scheme.³ You need to watch your spending on an ongoing basis, because obligations begin the moment the threshold is hit.⁴

Subcontractors are individuals or businesses hired by a contractor to carry out construction work or supply labour for it. Registration isn’t technically mandatory, but going unregistered means 30% withheld instead of 20%. Subcontractors based outside the UK who do construction work here should still register.²

What Counts as Construction Work

Section 74 of the Finance Act 2004 defines the operations that trigger CIS. The scope is wide and covers most physical work on buildings and land.⁵ It takes in:

Constructing, altering, repairing, extending, demolishing, or dismantling buildings and structures, permanent or temporary, including offshore installations
Civil engineering: walls, roadworks, power lines, railways, pipelines, reservoirs, sewers, docks, and harbours
Installing heating, lighting, air conditioning, ventilation, power, drainage, sanitation, water, or fire protection systems
Painting and decorating internal or external surfaces, and internal cleaning during construction or restoration
Site preparation: clearance, earth-moving, excavation, tunnelling, foundations, scaffolding, landscaping, and access roads

Several things sit outside the scheme. Architectural work, surveying, and building consultancy don’t fall under CIS. Neither does manufacturing building components or delivering materials to site: the exclusion covers making things off-site and transporting them, not installing them.⁵ Drilling for oil or gas, mineral extraction, purely artistic works like sculptures or murals, signwriting, and fitting security systems are also excluded.

One distinction catches people out: plant hire without an operator is outside CIS, but the same equipment hired with an operator falls inside it. When an operator comes with the machine, you’re paying for labour to do construction work.⁶

Registering and the Three Deduction Rates

The quickest route to register is online through the Government Gateway, which puts you on the 20% rate straight away. You’ll need your Unique Taxpayer Reference, legal and trading names, VAT number if you have one, and the date you started trading. Depending on your setup, HMRC may also ask for your National Insurance number, Company Registration Number, or partnership details.² Every detail must match HMRC’s existing records or the registration stalls. Postal forms exist if you can’t register online.⁷

Overseas sole traders and partnerships use the same process as UK businesses. Overseas limited companies must register by post and include a tax clearance certificate from their home country. If your overseas company deals in or develops UK land, register for corporation tax or self assessment before applying for CIS.⁸

Once registered, three deduction rates decide how much comes off each payment:

20% is the standard rate for registered subcontractors
30% applies to subcontractors who are unregistered or can’t be verified
0% goes to subcontractors with gross payment status, who receive the full amount with nothing withheld¹

The rate doesn’t apply to the full invoice. Materials the subcontractor paid for, along with VAT and certain other costs, come off first, so the deduction bites only on the labour element.¹ A subcontractor who buys significant materials will have a much smaller portion subject to withholding.

Gross Payment Status

Gross payment status means nothing is withheld, which is a real cash-flow advantage. HMRC checks three things: your compliance history (returns filed and tax paid on time), a business test (you carry out UK construction work or supply labour, and operate through a bank account), and a turnover test.⁹ The turnover thresholds, based on net construction turnover excluding VAT and materials over the past 12 months, are:

Sole traders: at least £30,000
Partnerships: at least £30,000 per partner, or £100,000 for the partnership
Limited companies: at least £30,000 per director, or £100,000 for the company. Companies controlled by five or fewer people need £30,000 per controlling individual

HMRC reviews the status periodically and can withdraw it if compliance slips. A single late return or missed payment can be enough.

Getting CIS Deductions Back

How you reclaim depends on your business structure.

Sole traders and partners record gross invoice amounts as income on their self assessment return and enter total CIS deductions in the “CIS deductions” field. HMRC works out your Income Tax and National Insurance for the year and offsets whatever contractors already withheld. If they took more than you owe, you get a refund.¹⁰

Limited companies must not claim CIS deductions through their corporation tax return; doing so can bring a penalty. Instead, claim them through monthly payroll. Send your Full Payment Submission as normal, then submit an Employer Payment Summary showing year-to-date CIS deductions. HMRC offsets those against your PAYE and National Insurance bill. If PAYE drops to zero and deductions remain, carry them forward to the next month within the same tax year.¹⁰

What Contractors Have to Do Each Month

Before paying a subcontractor for the first time, contractors must verify them with HMRC. Verification confirms whether the subcontractor is registered, what deduction rate applies, and whether they hold gross payment status.¹¹ Use HMRC’s free online CIS service, or commercial software if you’re checking more than 50 subcontractors. You’ll need your own UTR and employer reference, plus the subcontractor’s UTR and National Insurance number (for sole traders) or company name, UTR, and registration number (for limited companies). Details must match HMRC’s records exactly. If a subcontractor hasn’t appeared on your CIS returns in the current or previous two tax years, verify them again before paying.

After each deduction, you must give the subcontractor a payment and deduction statement within 14 days of the end of that tax month.¹ Subcontractors need these to reclaim their deductions.

Contractors also file a monthly CIS return covering all subcontractor payments in the tax month, due by the 19th of the following month. Payments made between 6 May and 5 June must be reported by 19 June.¹²

From 6 April 2026, a contractor who paid no subcontractors in a month must either file a nil return or notify HMRC in advance that no payments will be made. HMRC had previously suspended this requirement and has now reinstated it. Silence with no reasonable excuse will trigger a penalty, just as missing a regular return does.¹³

Records of payments and deductions must be kept for at least three years after the end of the tax year they relate to, showing the gross payment, materials deducted, and final deduction for each subcontractor.¹⁴ Subcontractors should keep their payment and deduction statements for the same period.

Penalties

Late CIS returns attract escalating penalties. One day late brings an immediate £100 fixed penalty. Two months late adds another £200. At six months, the penalty jumps to £300 or 5% of the deductions that should have been reported, whichever is greater. A further penalty on the same basis applies at 12 months.¹²

Contractors also face a penalty of up to £3,000 for reporting the wrong employment status for a subcontractor on a monthly return. If HMRC decides someone should have been treated as an employee rather than a subcontractor, back taxes, National Insurance, and penalties can dwarf the original contract value. Subcontractors can be fined for false information given at registration.²

The VAT Reverse Charge on Top of CIS

Since 1 March 2021, most VAT-registered businesses that report payments through CIS must also apply the VAT domestic reverse charge. Under normal VAT rules the supplier charges VAT and pays it over to HMRC; under the reverse charge, the customer accounts for that VAT instead.¹⁵

The reverse charge broadly follows the same scope as CIS, with the same exclusions for architecture, surveying, and manufacturing or delivering components on their own. Two extra categories sit outside it: end users and intermediary suppliers. An end user is a VAT-registered business that buys construction services without making onward supplies of them, such as a property management company renovating its own building. Building contractors are never end users, because they make onward supplies of construction work.¹⁶ End users must tell their supplier in writing to claim the exception. Without that written notice, the reverse charge applies by default.

1
GOV.UK. What You Must Do as a CIS Contractor – Make Deductions and Pay Subcontractors
2
GOV.UK. What You Must Do as a CIS Subcontractor – How to Register
3
HM Revenue & Customs. Construction Industry Scheme Reform Manual – Section 59(1)(l) Finance Act 2004
4
GOV.UK. Construction Industry Scheme – A Guide for Contractors and Subcontractors (CIS 340)
5
Legislation.gov.uk. Finance Act 2004 – Section 74
6
GOV.UK. The Scheme – Construction Operations – Plant Hire
7
HM Revenue and Customs. CIS – Individual Registration for Payment Under Deduction
8
GOV.UK. Construction Industry Scheme for Businesses Based Outside the UK
9
GOV.UK. How to Get Gross Payment Status
10
GOV.UK. Pay Tax and Claim Back Deductions
11
GOV.UK. What You Must Do as a CIS Contractor – Verify Subcontractors
12
GOV.UK. What You Must Do as a CIS Contractor – File Your Monthly Returns
13
GOV.UK. Simplification and Administrative Improvements to the Construction Industry Scheme
14
GOV.UK. What You Must Do as a CIS Contractor – Record Keeping
15
GOV.UK. Check When You Must Use the VAT Domestic Reverse Charge for Building and Construction Services
16
HM Revenue & Customs. VAT Reverse Charge for Building and Construction Services Manual