Complete Guide to CIS for Subcontractors in 2025

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax deduction system that applies to payments made by contractors to subcontractors in the construction industry. Under CIS, contractors must deduct money from subcontractor payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor's tax and National Insurance.

CIS applies to construction work in the UK, including building, alterations, repairs, decorating, demolition, and civil engineering. It covers most construction operations but excludes certain activities like architecture, surveying, and the manufacture of building materials off site.

Who needs to register for CIS?

Registration requirements depend on whether you operate as a contractor, subcontractor, or both. Contractors must register for CIS if they pay subcontractors for construction work. This includes construction companies, property developers, and businesses spending more than GBP 3 million on construction over a three year period.

Subcontractors do not have to register, but doing so reduces deductions from 30 percent to 20 percent. Gross payment status, which eliminates deductions entirely, is available to subcontractors who meet strict compliance tests.

• Unregistered subcontractors face 30 percent deductions on labour costs
• Registered subcontractors have 20 percent deducted
• Gross payment status means no deductions are taken
• Registration is free and can be done online or by phone

How CIS deductions work

Contractors calculate CIS deductions on the labour element of each payment. Materials costs are not subject to CIS provided they are itemised separately on invoices. VAT is also excluded from the calculation.

For example, if a subcontractor invoices GBP 1,000 for labour and GBP 500 for materials, the contractor deducts CIS only from the GBP 1,000 labour portion. At the standard 20 percent rate, that means GBP 200 goes to HMRC and GBP 1,300 goes to the subcontractor.

• Always separate labour and materials on invoices
• Keep receipts for all materials purchased
• VAT registered subcontractors add VAT after CIS is calculated
• Contractors must verify subcontractors with HMRC before each payment

CIS returns and deadlines

Contractors must submit monthly CIS returns to HMRC by the 19th of each month. Returns cover payments made in the previous tax month, which runs from the 6th of one month to the 5th of the next.

Late returns incur automatic penalties starting at GBP 100 and increasing to GBP 300 for repeated failures. Errors or omissions can also attract penalties, so accuracy matters.

Claiming CIS refunds

CIS deductions are advance tax payments. If your deductions exceed your tax liability, you can claim a refund. Limited companies offset CIS against their PAYE bill each month. Sole traders and partnerships claim refunds through their Self Assessment tax return.

Many subcontractors are entitled to substantial refunds, particularly those with high material costs or business expenses. We regularly help Staffordshire subcontractors recover thousands in overpaid CIS.

• Limited companies can offset CIS monthly against PAYE
• Sole traders claim through Self Assessment
• Keep all payment and deduction statements
• Refunds can take 4 to 12 weeks depending on claim type

Qualifying for gross payment status

Gross payment status lets subcontractors receive full payment without deductions. To qualify, you must meet turnover thresholds and pass compliance tests covering tax returns, payments, and National Insurance.

The turnover test requires net construction turnover of at least GBP 30,000 per year for sole traders or partners. Companies need GBP 30,000 per director. HMRC reviews gross payment status annually and can withdraw it for compliance failures.

• All tax returns must be filed on time
• Tax payments must be up to date
• Business bank account required
• Annual review by HMRC determines continued eligibility

Common CIS mistakes to avoid

We see several recurring errors that cost subcontractors money or trigger HMRC enquiries. Failing to register is the most expensive, adding 10 percentage points to every deduction. Not separating materials on invoices means paying CIS on costs that should be exempt.

Contractors also make mistakes, from failing to verify subcontractors to submitting returns late. Both parties should keep detailed records and reconcile payments against HMRC statements.

• Register before starting work to avoid 30 percent deductions
• Always itemise materials separately on invoices
• Keep copies of all payment and deduction statements
• Verify your CIS status matches HMRC records

CIS and other taxes

CIS interacts with other taxes in ways that catch some subcontractors off guard. VAT registered businesses must still charge VAT on top of CIS liable work. The reverse charge VAT rules for construction add another layer of complexity for many trades.

Self employed subcontractors must also pay Class 2 and Class 4 National Insurance through Self Assessment. Limited company subcontractors handle PAYE and corporation tax separately. Getting advice from a construction specialist accountant helps you navigate these overlapping obligations.

Key takeaways

• Register for CIS to reduce deductions from 30 percent to 20 percent
• Separate labour and materials on every invoice
• Keep all payment statements for refund claims
• Consider gross payment status if you meet the compliance tests
• Submit contractor returns by the 19th of each month
• Claim refunds through Self Assessment or monthly PAYE offsets

How we can help you

We specialise in:

• CIS registration and verification
• Monthly CIS return submissions
• CIS refund claims
• Gross payment status applications
• Construction industry tax planning

Contact K&R Accountants for a free CIS review. We help subcontractors across Stoke-on-Trent and Staffordshire maximise refunds and stay compliant.