How Does CIS Work for Subcontractors?

CIS from the subcontractor's side

If you work as a subcontractor on a UK construction site — whether you are a sole trader bricklayer, a limited company scaffolder, or a one-person plastering business — the Construction Industry Scheme (CIS) applies to you. It means the contractor you work for will almost always hold back a percentage of your pay and send it straight to HMRC.

This is not a fine or an extra tax. It is an advance payment towards your annual tax bill. The money still belongs to you — it just reaches you in two stages: most of it now, through your pay, and the rest later, as a refund on your self assessment.

Step 1: Register as a subcontractor

Before you start work, register with HMRC as a CIS subcontractor. You can do this online once you have your Unique Taxpayer Reference (UTR). Registration is free, and it is the single most important thing you can do to protect your cashflow.

If you do not register, the contractor is legally required to deduct tax at the highest rate of 30%. That means nearly a third of your labour income is held back until you reclaim it the following year. Registered subcontractors are usually deducted at the standard 20% rate instead — and those with strong compliance records can qualify for 0% (gross payment status).

Step 2: Get verified by each contractor

Every contractor you work for must verify you with HMRC before they pay you. They will ask for your UTR and your National Insurance number (or company UTR if you trade through a limited company), and HMRC will tell the contractor which deduction rate to apply to you.

You do not do anything for this step — the contractor handles it — but you should make sure you give them the correct details. A wrong UTR means the verification fails and the 30% rate kicks in by default.

Step 3: Understand the deduction rates

There are three possible rates:

• ◢0% — gross payment status: You are paid in full with no deduction. Reserved for subcontractors with a clean compliance history, up-to-date tax returns, and a track record of paying tax on time.
• ◢20% — standard rate: Applied to most registered subcontractors. The contractor deducts 20% of the labour element of your invoice.
• ◢30% — higher rate: Applied to unregistered subcontractors, or those HMRC cannot verify. This is the penalty rate and a strong reason to register before you start.

The deduction is taken from the labour part of your payment only — not from materials you supply. Most contractors split your invoice into labour and materials, and CIS is calculated on the labour figure.

Step 4: Keep your deduction statements

Every time a contractor pays you under CIS, they must give you a deduction statement (often called a CIS payment and deduction statement). It shows:

• ◢The gross amount you were paid
• ◢The cost of materials
• ◢The amount of CIS tax deducted
• ◢The contractor's name and tax reference

Keep every one of these statements. They are your proof of what was deducted, and you will need them when you file your self assessment to reclaim any overpaid tax. Without them, you may not be able to evidence the deductions HMRC has on record.

Step 5: Reclaim over-deducted tax on your self assessment

CIS deductions are not your final tax bill — they are payments on account. At the end of the tax year you file a self assessment tax return, and the total CIS deducted across the year is set against your actual income tax and Class 4 National Insurance liability.

• ◢If your CIS deductions are more than your actual tax bill, the excess is refunded to you by HMRC.
• ◢If they are less, you pay the balance by the 31 January deadline.

This is why accurate deduction statements matter so much. If a contractor deducted £6,000 across the year but your actual liability is only £4,000, you are owed a £2,000 refund — but only if you can prove the deductions.

How to qualify for gross payment status (0%)

Gross payment status means no CIS deductions at all — you are paid in full by every contractor. To qualify you must show HMRC that you:

• ◢Have been in business for at least 12 months (or have a track record in construction)
• ◢Have filed all your tax returns on time
• ◢Have paid all your tax due on time
• ◢Have a clean compliance record with no serious tax debts

HMRC reviews these conditions strictly. If you are granted gross status and then fall behind on your returns or payments, HMRC can remove it — and getting it back is difficult. Many subcontractors lose gross status because of a single late return, so it pays to stay on top of your filings.

Common subcontractor mistakes

• ◢Not registering before the first job, and being hit with the 30% rate.
• ◢Losing deduction statements and then being unable to prove what was deducted.
• ◢Treating CIS deductions as a final tax and not filing self assessment, missing out on a refund.
• ◢Letting returns slip and losing gross payment status.
• ◢Not separating materials from labour on invoices, leading to over-deduction.

How we help subcontractors

As construction accountants we work with subcontractors across London to make CIS painless:

• ◢Register you with HMRC as a CIS subcontractor
• ◢Track your deductions through the year from your statements
• ◢File your self assessment and reclaim any over-deducted CIS tax
• ◢Help you build the compliance history needed for gross payment status
• ◢Keep your returns on time so you never risk losing gross status

If CIS is holding back your cashflow, book a free review and we will look at your current position and how much you could be owed.

This article is for general guidance only and does not constitute formal tax advice. CIS rules change — always confirm the current position with HMRC or a qualified accountant.