CIS (Construction Industry Scheme)

The Construction Industry Scheme (CIS) is a mandatory UK tax arrangement that requires contractors to deduct tax from payments made to subcontractors for construction work. The deducted amounts go directly to HMRC as advance payments toward the subcontractor's income tax and National Insurance contributions. CIS applies to both parties: contractors must operate it correctly or face financial penalties, and subcontractors who understand it can protect their cash flow and meet their compliance obligations without unwelcome surprises.

What Work Falls Under CIS

CIS covers most construction work carried out by self-employed subcontractors, including new build, alteration, repair and maintenance, demolition, site clearance, and the installation of electrical, plumbing, and heating systems. Work done directly for a homeowner outside a contractor relationship generally falls outside the scheme, as does the supply of materials alone.

A business can be both a contractor and a subcontractor at the same time. An electrical sub-contractor engaged by a main contractor is in the scheme as a subcontractor. If that same business then brings in a labourer or another trade to assist, it becomes a contractor and must operate CIS on those payments too.

The Three Deduction Rates

Before making any payment to a subcontractor, a contractor must verify the subcontractor's status with HMRC. That verification sets the deduction rate that applies to every subsequent payment:

• 0% - Gross payment status (GPS). The subcontractor receives their full invoice amount with nothing withheld. GPS requires passing HMRC's turnover, compliance, and business tests and is the exception rather than the norm.
• 20% - The standard rate for subcontractors who are registered with CIS and verified against HMRC's records.
• 30% - Applied when a subcontractor is not registered or cannot be matched by HMRC. This higher rate is entirely avoidable through registration.

CIS deductions apply to the labour element of an invoice only. Materials billed separately are excluded from the calculation. A contractor who deducts too little is liable to HMRC for the shortfall, not the subcontractor.

CIS Returns and Record-Keeping

Contractors must submit a monthly CIS300 return showing all payments and deductions. From 6 April 2026, nil returns became mandatory: contractors must file even in months where no subcontractors were paid, with penalties of up to £3,000 for late filing. Returns must reach HMRC by the 19th of the month following the tax month end. Contractors must also issue a payment and deduction statement (PDS) to each subcontractor within 14 days of the end of each tax month.

How Subcontractors Recover CIS Deductions

CIS deductions are not a final tax charge. Subcontractors declare their gross income and total CIS deductions on their annual Self Assessment return. HMRC offsets the deductions against the income tax and National Insurance liability calculated on that return. Where more has been deducted through the year than was owed - common for subcontractors with legitimate business expenses - HMRC issues a refund.

Tracking CIS-applicable labour separately from materials across all live purchase orders and keeping payment and deduction statements filed alongside invoice records reduces the administrative risk that tends to surface at year end. Zigaflow's invoices feature gives construction businesses a single place to record, track, and reconcile payments against subcontractor accounts.