Construction Industry Scheme (CIS) – A Practical Guide for Contractors & Subcontractors
The Construction Industry Scheme (CIS) is designed to reduce tax evasion within the construction sector by requiring contractors to deduct tax at source from payments made to subcontractors
If you operate in construction — whether as a contractor or subcontractor — getting this right is essential. Errors can be expensive, time-consuming and stressful.
Here’s a clear, practical breakdown.
1️⃣ What is CIS?
Under CIS, contractors must:
- Verify new subcontractors with HMRC
- Deduct tax at the correct rate (20% or 30%, unless gross status applies)
- Pay deductions to HMRC monthly
- Submit monthly returns via RTI
The scheme applies to “mainstream contractors” and also certain “deemed contractors” where construction spend exceeds £3m over a 12-month period
2️⃣ Employment Status – CIS or PAYE?
A key risk area is employment status.
If a worker is genuinely self-employed, CIS applies.
If they are effectively an employee, PAYE must be used instead.
Status is determined by the actual working relationship — not preference. HMRC’s CEST tool can assist, but professional judgement is often required.
Incorrect classification can lead to PAYE arrears, penalties and interest.
3️⃣ Verifying Subcontractors
Before paying a subcontractor, you may need to verify them with HMRC.
HMRC will confirm:
- Whether they are registered
- The deduction rate to apply
- Whether gross payment status applies
If unregistered, a 30% deduction rate applies.
Deductions must be paid to HMRC within 14 days of the month end (17 days if paid electronically).
4️⃣ Gross Payment Status – What’s Required?
Subcontractors can apply to receive payments without deduction, but must pass three tests:
✔ Business Test
Must demonstrate a genuine UK construction business with evidence such as invoices, contracts, bank account and accounts records
✔ Turnover Test
Minimum net construction turnover:
- £30,000 (individual)
- £30,000 per partner (partnership)
- £100,000 (alternative company/partnership test)
✔ Compliance Test
Must be compliant with:
- CIS returns
- Self assessment
- PAYE
- VAT (from 6 April 2024)
Late filing or payment history can prevent approval.
5️⃣ Common CIS Mistakes
- Failing to verify subcontractors
- Using CIS when PAYE applies
- Missing monthly returns
- Paying deductions late
- Assuming gross status continues automatically
CIS compliance isn’t just admin — it’s risk management.
Final Thoughts
CIS is straightforward in principle but complex in practice. With monthly obligations, employment status risks and strict compliance tests, professional oversight can prevent significant issues.
If you’re a contractor unsure about verification or a subcontractor considering gross payment status, now is a good time to review your position before HMRC does.
