Understanding the Construction Industry Scheme (CIS): A Complete Guide for UK Contractors

🔹 Introduction

If you’re a contractor or subcontractor working in the UK construction industry, understanding the Construction Industry Scheme (CIS) isn’t optional—it’s essential. Overseen by HMRC, the CIS governs how payments are made between contractors and subcontractors, especially how tax deductions are handled.

In this guide, we’ll explain everything you need to know about CIS: who it applies to, how it works, and why CIS compliance is crucial to avoiding penalties.

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🔹 What Is the Construction Industry Scheme (CIS)?

The CIS is an HMRC scheme that requires contractors to deduct money from subcontractor payments and send it directly to HMRC. These deductions act as advance payments toward the subcontractor’s tax and National Insurance.

The scheme was introduced to combat tax evasion and ensure fair reporting across the construction supply chain.

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🔹 Who Must Register for CIS?

➤ Contractors:

A contractor is anyone who:

• Pays subcontractors for construction work, or

• Spends more than £3 million on construction in any 12-month period.

Contractors must register with CIS and are legally responsible for deducting and submitting tax to HMRC on behalf of their subcontractors.

➤ Subcontractors:

If you work for a contractor and receive payments for construction work, you’re considered a subcontractor. Registration is not mandatory, but if you don’t register, deductions are taken at the higher rate (30%) rather than the standard 20%.

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🔹 Gross Payment Status: What It Means

If you’re a subcontractor with a strong compliance history, you can apply for gross payment status. This allows you to receive payments in full without deductions.

To qualify, you must:

• Have paid tax and National Insurance on time in the past.

• Operate a UK business.

• Meet turnover thresholds.

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🔹 How Does CIS Work?

1. Contractor registers with HMRC

2. The subcontractor also registers

3. Contractor verifies subcontractor’s CIS status

4. Contractor deducts 20% or 30% from payments (unless gross payment applies)

5. Deductions are submitted monthly to HMRC via a CIS return

6. HMRC credits the subcontractor’s tax account

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🔹 CIS Deduction Rates

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🔹 Key CIS Deadlines & Compliance Rules

• Monthly CIS return due: By the 19th of each month

• Late submission penalties: Can start at £100 and escalate quickly

• Keep accurate records: For at least 3 years

• You must issue deduction statements to subcontractors each month

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🔹 Common CIS Mistakes to Avoid

• Not registering with CIS before starting contracts

• Failing to verify a subcontractor’s status

• Incorrect deduction amounts

• Missing monthly return deadlines

• Treating employees as subcontractors (risking IR35 issues)

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🔹 Best Accounting Tools for CIS Management

Managing CIS manually can be risky. Here are some CIS-ready tools:

• Xero with CIS module

• QuickBooks Online

• BrightPay (for payroll + CIS)

• FreeAgent (great for small subcontractors)

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🔹 Why Work With a CIS Accountant?

Construction accounting is not like general accounting. A specialist CIS accountant can:

• Handle monthly submissions

• Minimise risk of penalties

• Help apply for gross payment status

• Integrate your CIS into broader tax planning

Avoid the DIY risk—errors here can cost thousands.

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🔹 FAQs About CIS

Do I need to register for CIS if I only work with limited companies?
Yes, CIS applies to payments for construction work, even if the subcontractor is a limited company.

Is VAT included in CIS deductions?
No, deductions are based on the labour portion of the invoice (excluding VAT and materials).

Can I backdate my CIS registration?
You cannot backdate registration, but you can appeal penalties if you have a valid reason.

🔚 Final Thoughts

CIS can feel like a minefield, but with the right knowledge—and the right accountant—it becomes just another part of running a profitable contracting business.