CIS for Contractors:
What You Need to Know

If your business pays subcontractors for construction work, the Construction Industry Scheme (CIS) is not optional — it is a statutory withholding regime, and getting it wrong carries real financial and criminal-law consequences. This guide explains exactly what a contractor (as opposed to a subcontractor) must do under CIS, in plain English, with references to the underlying legislation.

CIS is established under the Finance Act 2004, Part 3, Chapter 3 and detailed in the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045). All figures and procedures below reflect HMRC guidance current as at June 2026.

01 What is the Construction Industry Scheme?

CIS requires contractors to deduct money from payments to subcontractors and pass it to HMRC. The deduction counts as an advance payment towards the subcontractor's tax and National Insurance. It is conceptually similar to PAYE, but for self-employed subcontractors rather than employees.

CIS applies to most construction work in the UK: site preparation, demolition, building work, alterations, repairs, decorating, and installation of systems for heating, lighting, power, water and ventilation. Some activities are specifically excluded, including architecture and surveying, scaffolding hire (without labour), carpet fitting, and delivering materials.

02 Are you a contractor under CIS?

You are a contractor for CIS purposes if you pay subcontractors for construction work, and either: (a) your business is in the construction industry, or (b) you spend more than £3 million on construction in the 12 months since your first payment ( the “deemed contractor” rule), even if construction is not your main business — this catches large retailers, housing associations and similar organisations that commission substantial building work.

03 Registering as a contractor

You must register as a contractor with HMRC before making your first payment to a subcontractor for construction work. Registration is done online via your HMRC business tax account. Once registered, you will need to:

• Verify every new subcontractor with HMRC before paying them for the first time
• Make the correct deduction from each payment based on the subcontractor's verified status
• Issue a written statement of deduction to each subcontractor for each payment
• File a monthly CIS return (form CIS300) with HMRC, even in months with no payments
• Pay over deductions to HMRC by the usual PAYE-style deadlines
• Keep CIS records for at least 3 years after the end of the tax year they relate to

04 Verifying subcontractors before paying them

Before paying a new subcontractor for the first time, you must verify them with HMRC, either online through your HMRC business account or via compatible payroll/CIS software. Verification tells you which deduction rate to apply: 0% (gross), 20% (standard), or 30% (higher). If a subcontractor has worked for you within the current or two previous tax years and you have filed a return including them in that period, you may not need to re-verify — check the specific HMRC rules before assuming this exemption applies.

05 Deduction rates explained

The deduction is calculated on the labour element of the payment only. Materials genuinely supplied by the subcontractor (with evidence, such as invoices) are excluded from the deduction calculation — CIS is not deducted on the cost of materials, only on labour charges.

06 Making deductions and issuing statements

For every payment you make to a subcontractor under deduction, you must give them a written statement showing the gross amount, the cost of materials excluded, the rate of deduction applied, and the amount deducted. This statement (often called a CIS deduction statement or payment and deduction certificate) must be provided within 14 days of the end of the tax month in which the payment was made. The subcontractor needs this document to support their own Self Assessment return and any refund claim.

07 The monthly CIS300 return

Every contractor must submit a CIS300 return to HMRC for each tax month, covering the 6th of one month to the 5th of the next, by the 19th of the month following the end of that period. The return lists every subcontractor paid, the gross amount, the cost of materials, and the deduction made.

Deductions collected must be paid over to HMRC by the 22nd of the month (electronic payment) or 19th (cheque/post) following the end of the tax month — the same deadline structure used for PAYE.

08 Gross payment status

Subcontractors can apply to HMRC for gross payment status, meaning contractors pay them in full with no deduction, and the subcontractor settles their tax liability directly through Self Assessment, similarly to any other self-employed person. To qualify, the subcontractor must pass HMRC's business, turnover and compliance tests — broadly: the business is run through a bank account, construction turnover exceeds £30,000 (for a sole trader; different thresholds apply to partnerships and companies), and the applicant has a clean compliance history with HMRC (tax returns and payments up to date).

As a contractor, when you verify a subcontractor, HMRC's system tells you whether they hold gross status — you do not need to separately assess this; simply apply the rate HMRC confirms.

09 Penalties for getting it wrong

• Late CIS300 returns: an automatic £100 penalty for being one day late, rising to £200 after 2 months, £300 (or 5% of deductions, whichever is higher) after 6 months, and a further £300 (or 5%) after 12 months. Penalties can total £3,000 or more per return for serious delay.
• Failure to register as a contractor before paying subcontractors, or paying without verification, can result in HMRC treating the full payment as subject to the 30% higher rate retrospectively, with the contractor liable for the shortfall if they failed to deduct correctly.
• Incorrect returns (understating deductions, misclassifying employees as subcontractors) can trigger HMRC compliance checks and additional penalties for careless or deliberate errors, under the general penalty regime in Finance Act 2007, Schedule 24.
• Employment status risk: if HMRC determines that a “subcontractor” was in reality an employee (assessed under established employment status tests — control, substitution, mutuality of obligation), the contractor can be liable for unpaid PAYE and employer NIC going back multiple years, in addition to CIS-specific penalties.

10 Common mistakes contractors make

• Deducting CIS on materials rather than labour only, overstating the deduction and creating cash-flow problems for subcontractors
• Not verifying new subcontractors before the first payment, defaulting to the wrong rate
• Missing the monthly CIS300 deadline or forgetting to file a nil return in quiet months
• Treating genuine employees as subcontractors to avoid PAYE — this is a serious compliance risk, not a legitimate cost-saving strategy
• Failing to issue deduction statements to subcontractors within the 14-day window, leaving them unable to prove deductions on their own tax return
• Poor record-keeping — CIS records must be kept for at least 3 years and produced on request during an HMRC compliance check

11 Frequently asked questions