How CIS Deductions Work (Construction Industry Scheme)

If you do work for another contractor, you have probably seen a chunk taken off your invoice before you got paid. That is the Construction Industry Scheme (CIS) at work, and for a lot of tradespeople it feels like money vanishing for no clear reason. Once you understand how it works, it stops being a mystery and becomes just another part of running the books.

This guide breaks down what CIS is, who it applies to, the deduction rates, and how to keep your cash flow steady while it is in play.

What Is the Construction Industry Scheme?

CIS is a HMRC scheme that governs how contractors handle payments to subcontractors in the construction sector. Under it, a contractor takes a deduction from a subcontractor's payment and passes it straight to HMRC. That deduction counts as an advance payment towards the subcontractor's tax and National Insurance.

In plain terms: instead of you getting your full invoice and sorting the tax later, some of your tax is taken off at source. It is not an extra tax. It is your own tax, paid earlier than it otherwise would be.

CIS covers most construction work in the UK — building, alterations, repairs, demolition, installation, decorating and groundwork among them. Some jobs sit outside it (for example, certain professional, surveying or purely manufacturing work), so if you are unsure whether your trade falls in scope, check the current HMRC guidance rather than assuming.

Who Counts as a Contractor and a Subcontractor?

The scheme uses two roles, and you can be both at the same time.

• Contractor — a business that pays subcontractors for construction work. This includes mainstream builders, but also "deemed contractors" whose spend on construction passes a threshold even if construction is not their main business.
• Subcontractor — a business that carries out construction work for a contractor.

If you are a sole-trader sparky doing work for a main builder, you are the subcontractor and the builder deducts CIS from your payments. If you then take on a labourer or another trade for that job and pay them, you are also acting as a contractor and may need to deduct from them.

Both contractors and subcontractors should register with HMRC for CIS. You can still be paid without registering, but it costs you more — which brings us to the rates.

CIS Deduction Rates

There are three deduction rates, and which one applies depends on your registration status with HMRC. As a rough guide:

• 20% — the standard rate for subcontractors who are registered for CIS.
• 30% — the higher rate for subcontractors who are not registered, or whose details cannot be verified.
• 0% (gross payment status) — for subcontractors who meet HMRC's turnover and compliance tests and apply successfully. They get paid in full and settle their tax through their normal return.

The maths is straightforward. Say a registered subcontractor invoices £2,000 for labour. At 20%, the contractor deducts £400 and pays £1,600, sending the £400 to HMRC on the subcontractor's behalf.

Tip: CIS is only deducted from the labour element. The cost of materials, plant hire and certain other items should be taken out of the figure before the deduction is calculated — so itemise materials clearly on every invoice.

That last point matters. If you lump labour and materials into one line, a contractor may end up deducting CIS on the whole lot, which costs you cash you should not have lost. Clear, itemised invoices protect you here. A few small invoicing habits make a real difference to how much lands in your account and how quickly.

Verification and Registration

Before a contractor pays a new subcontractor, they should verify them with HMRC. This check confirms whether the subcontractor is registered and which rate applies. If you have not registered, expect the 30% rate until you do.

To register as a subcontractor you will generally need your business details, Unique Taxpayer Reference (UTR) and National Insurance number. Registration is free and, for most people, well worth it — moving from 30% to 20% leaves a lot more cash in the business each month.

Gross payment status is the prize for established firms: you keep 100% of your payments and deal with tax through your usual returns. HMRC sets turnover and compliance conditions for it, and reviews status periodically, so check the current requirements before applying.

How CIS Affects Your Cash Flow

The deduction is your money — you are not losing it, you are getting it back later through your tax return or as a refund. But "later" is the problem. Having 20% (or 30%) held back month after month can leave a healthy-on-paper business short of working cash.

A few habits keep things under control:

• Keep every CIS statement. Contractors must give you a monthly deduction statement showing what they took. These are your proof when you reconcile your tax — treat them like gold.
• Reconcile as you go. Don't wait until year end to add up deductions. Log them against each job as the payments come in.
• Plan for the refund, not around it. Many subcontractors are owed money back once allowable expenses are counted. Knowing roughly where you stand stops nasty surprises.
• Itemise materials. As above — keep labour and materials separate so CIS is only taken where it should be.

This is where having your jobs, quotes and invoices in one place earns its keep. A job-management system like Gaffer keeps the labour and materials split clean on every invoice, tracks what each contractor has paid, and chases the rest automatically — so the deductions you can see are accurate and the cash you are owed does not slip through the cracks. Less time on spreadsheets, fewer errors when the tax return lands.

If late payment is squeezing you on top of CIS, it is worth tightening the whole process — getting paid faster is half the battle when a fifth of every invoice is already held back.

Staying Compliant as a Contractor

If you pay subcontractors, the obligations sit with you:

1. Register as a contractor with HMRC before you take anyone on.
2. Verify each subcontractor before their first payment.
3. Deduct the correct rate from the labour element only.
4. Pay the deductions to HMRC, usually monthly.
5. File a monthly CIS return and give each subcontractor a deduction statement.
6. Keep records — HMRC can ask to see them.

Miss a monthly return or a deadline and penalties can mount quickly, so it is worth getting a system in place rather than relying on memory. Rules and thresholds do change, so always confirm the current position with HMRC or your accountant before filing.

FAQs

Is the CIS deduction an extra tax?

No. It is an advance payment towards your Income Tax and National Insurance. You get it credited when you file your return, and you may even be due a refund once allowable expenses are accounted for.

Do I have to register for CIS as a subcontractor?

You do not have to, but if you are not registered the contractor must deduct at the higher 30% rate instead of 20%. Registering is free, so for almost everyone it is worth doing to keep more cash in the business.

Is CIS deducted from materials?

No — CIS should only be taken from the labour element of your invoice. Materials, plant hire and similar costs should be removed before the deduction is calculated, which is why itemising your invoices clearly matters.

What is gross payment status?

It lets qualifying subcontractors be paid in full, with no CIS deducted, and settle their tax through their normal returns. HMRC sets turnover and compliance tests to qualify, so check the current rules before applying.