What Is CIS Tax? A Complete Guide for Builders

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of special tax rules that apply to work done in the UK construction industry. Under CIS, a contractor does not pay subcontractors gross in full — instead, the contractor deducts a percentage of the payment and sends it directly to HMRC as an advance payment towards the subcontractor's tax and National Insurance.

CIS exists because construction has a high proportion of self-employed subcontractors, and HMRC wanted a way to collect tax from them in real time rather than waiting for a single self assessment at the end of the year. The scheme has been around in various forms since the 1970s and is one of the most admin-heavy parts of running a building business.

Who counts as a contractor?

You are a CIS contractor if you run a business that includes construction work — or if you spend more than £3 million a year on construction operations across your whole business (the "deemed contractor" threshold). Main contractors, developers, and even non-construction businesses that spend heavily on building work can fall into CIS.

As a contractor you must:

• ◢Register with HMRC as a CIS contractor before you take on your first subcontractor.
• ◢Verify every new subcontractor with HMRC before paying them, to confirm their registration status and the correct deduction rate.
• ◢Deduct the right percentage from each subcontractor's payment.
• ◢File a monthly return (CIS300) showing every subcontractor you paid, what you paid them, and what you deducted.
• ◢Give each subcontractor a deduction statement showing the amounts, so they can reclaim over-deducted tax later.

Who counts as a subcontractor?

A subcontractor is anyone who does construction work for a contractor and is not an employee on PAYE. That includes sole traders, partnerships, personal service companies, and limited companies. Even a one-man-band bricklayer who only works for one builder is a subcontractor under CIS.

Subcontractors must register with HMRC to receive payments under CIS. If they do not register, contractors are forced to deduct tax at the highest rate — 30% — which is a serious cashflow problem.

The three CIS deduction rates

When a contractor verifies a subcontractor, HMRC tells them which rate to apply:

• ◢0% (gross payment status): The subcontractor is paid in full with no deduction. This is reserved for businesses with a strong compliance history and a clean tax record.
• ◢20% (standard rate): Applied to most registered subcontractors. The contractor deducts 20% of the labour element of the payment.
• ◢30% (higher rate): Applied to unregistered subcontractors or those HMRC has not verified. This is the penalty rate — and a strong reason to register before you start work.

The deduction applies only to the labour part of the payment, not to the cost of materials. Most contractors split the invoice into labour and materials to calculate the deduction correctly.

What counts as "construction operations"?

CIS covers a wide range of building work, including:

• ◢Site preparation, groundwork and demolition
• ◢New builds, extensions and renovations
• ◢Bricklaying, carpentry, plastering, roofing and plumbing on site
• ◢Decorating, scaffolding and site installation work

It does not cover professional services like architecture or surveying, the supply of materials only, or work on a building that is not a construction operation (for example, carpet fitting in a finished home). Getting this boundary right is one of the most common areas where builders get CIS wrong.

Monthly returns: the CIS300

Every month, a contractor must file a CIS300 return with HMRC. It is due by the 19th of the following month, and it lists:

• ◢Every subcontractor you paid that month (by UTR and verification number)
• ◢The gross amount of each payment
• ◢The cost of materials
• ◢The amount of CIS tax you deducted

You must file even if you paid no subcontractors in a month — a "nil return" is still required. Missing the deadline brings automatic penalties, which escalate the more returns you miss in a year.

Reclaiming over-deducted tax

For a subcontractor, the CIS deductions are not a final tax bill — they are an advance payment. At the end of the tax year, the subcontractor files a self assessment tax return, and the total CIS deducted is set against their actual income tax and Class 4 National Insurance liability. If more was deducted than is owed, the excess is refunded.

This is why accurate deduction statements from contractors matter so much: without them, a subcontractor cannot prove what was deducted and may lose out on a refund.

Common CIS mistakes we see

• ◢Not registering before starting work, forcing the 30% rate on subcontractors.
• ◢Treating workers as self-employed when they are really employees, which HMRC challenges under IR35 and employment status rules.
• ◢Forgetting nil returns in quiet months, leading to avoidable penalties.
• ◢Deducting CIS on materials as well as labour, over-deducting and starving the subcontractor of cash.
• ◢Missing the verification step and applying the wrong rate.

How a CIS accountant helps

CIS is not difficult in principle, but it is relentless — every month, every subcontractor, every payment. A specialist construction accountant will:

• ◢Register you as contractor or subcontractor with HMRC
• ◢Verify subcontractors and track their status
• ◢Prepare and file your monthly CIS300 on time
• ◢Reconcile CIS deductions against payroll and VAT
• ◢Reclaim over-deducted tax through your self assessment

If you run a building business in London and CIS is eating into your time or your cashflow, we can take it off your hands entirely. Book a free review and we will look at how your CIS is being handled today.

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.