The Construction Industry Scheme catches a lot of people who don’t think of themselves as “in construction”: anyone doing site preparation, alterations, repairs, decorating, or installing heating and electrical systems can fall inside it, whether they’re a one-person operation or a limited company. A couple of rule changes landed this year that haven’t fully filtered through to older guides yet, so here’s where things stand now.
The three deduction rates
When a contractor pays a subcontractor under CIS, they deduct tax up front and pass it to HMRC on the subcontractor’s behalf: an advance payment toward that subcontractor’s eventual tax bill, similar in spirit to PAYE. The rate depends on the subcontractor’s status.
| Status | Deduction |
|---|---|
| Registered with CIS | 20% |
| Not registered with CIS | 30% |
| Gross Payment Status | 0% (paid in full) |
Registering isn’t compulsory for subcontractors, but the gap between 20% and 30% is wide enough that almost nobody skips it deliberately.
What the deduction is calculated on catches people out: it isn’t the full invoice. Before applying the percentage, the contractor subtracts VAT, the cost of materials the subcontractor paid for directly, consumable stores, fuel (except fuel used for travelling, which stays in), hired plant, and the cost of manufacturing or prefabricating materials. Contractors can ask for receipts as evidence of materials cost, but if a subcontractor can’t provide any, HMRC allows the contractor to estimate it instead. They don’t just deduct from the full amount by default.
Who needs to register, and what counts as CIS work
You need to register as a contractor if you pay subcontractors for construction work, or if you’re a non-construction business that’s spent more than £3 million on construction in the past 12 months. That rule catches larger retailers or landlords doing major refurbishment work, even though construction isn’t their main trade.
You register as a subcontractor if you’re a sole trader, a partner, or a limited company doing construction work for a contractor. Employees don’t register. CIS is for the self-employed and businesses, not people on a contractor’s payroll.
CIS covers most hands-on construction work: site preparation, foundations, demolition, building work, alterations, repairs, decorating, and installing heating, lighting, power, water or ventilation systems. It specifically excludes architecture and surveying, scaffolding hire where no labour is supplied, carpet fitting, manufacturing materials off-site, delivering materials, and anything on a site that clearly isn’t construction, like running a site canteen.
Before the first payment: verification
Contractors must verify a new subcontractor with HMRC before paying them for the first time, and must re-verify anyone who hasn’t appeared on a CIS return in the current or previous two tax years. The details supplied need to match exactly what the subcontractor used to register: UTR and National Insurance number for a sole trader, or company registration number and UTR for a limited company. Get the match wrong and the subcontractor is treated as unverified, so the contractor has to apply the 30% rate until it’s sorted out, regardless of whether the subcontractor is genuinely registered.
Filing deadlines: a rule that came back this year
Contractors file a return every tax month, due by the 19th of the following month. For the tax month running 6 May to 5 June, for example, the return has to reach HMRC by 19 June. Miss it and the penalties escalate quickly: £100 the moment it’s a day late, another £200 at two months, then £300 or 5% of the CIS deductions on the return (whichever is higher) at six months, and the same again at twelve months.
One change is worth knowing about, because it reverses something that had been true for over a decade. As of April 2026, nil returns are compulsory again. If you paid no subcontractors in a given tax month, you now have to actively file a nil return rather than simply doing nothing, unless you’ve told HMRC in advance that no payments will be made. HMRC brought this back specifically because contractors who assumed “nothing to report” meant “nothing to file” kept racking up avoidable late-filing penalties.
Gross Payment Status: getting paid without deductions
Subcontractors who meet three tests can apply to be paid gross, with no deduction at all. The business test requires you to run construction (or labour-supply) work in the UK through a proper business bank account. The turnover test looks at the past 12 months, net of VAT and materials: £30,000 for a sole trader; for a partnership, £30,000 per partner or £100,000 for the whole partnership; for a limited company, £30,000 per director (or per controlling shareholder, for companies with five or fewer) or £100,000 for the whole company. And the compliance test means your tax record needs to be clean: returns and payments made on time, including your VAT record.
As of April 2026, HMRC has stronger powers here too. Gross Payment Status can now be cancelled immediately, rather than after a notice period, where a payment is connected to fraud, and anyone who loses it that way is barred from reapplying for five years instead of one, with a personal penalty of up to 30% possible on top. It’s a meaningfully harder line than before, so treat gross status as an ongoing compliance position rather than a one-off application you file and forget about.
If you operate through a limited company
CIS deductions apply the same way whether a subcontractor is a sole trader or a limited company: a company subcontractor gets the same 20%/30%/0% treatment and goes through the same verification process. The difference is in how the deductions get recovered. A limited company can offset CIS deductions suffered against its own PAYE and National Insurance liabilities as an employer, and claim any balance back against Corporation Tax, VAT, or PAYE, or ask for a direct repayment, but only once all relevant PAYE, CIS and Corporation Tax returns have been submitted.
Where this fits with the bigger picture
If you’re a self-employed CIS subcontractor with income over £50,000, you’re also now inside Making Tax Digital for Income Tax, which changes how you report to HMRC through the year. Our Making Tax Digital guide covers what that involves.
CIS is one of those areas where getting the mechanics slightly wrong (an incorrect materials deduction, a missed nil return, a lapsed Gross Payment Status application) tends to show up as a cash-flow problem before anyone notices the paperwork behind it. Our specialist construction accounting service handles CIS for contractors and subcontractors day to day, so get in touch if you’d like your current setup checked over.
Last reviewed: 19 August 2026. This is general guidance, not personalised advice. Rules and figures may have changed since publication, so please check with us before acting on it.
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