CIS deductions explained: complete guide for UK subcontractors 2026

What CIS is, and why money comes off your invoice

The Construction Industry Scheme requires a contractor to withhold tax from what they pay a subcontractor and send it straight to HMRC. If you are registered, that is 20% of the labour on your invoice. If you are not, it is 30%. If you hold gross payment status, it is nothing.

The deduction is not a penalty and it is not lost. It is an advance payment against the Income Tax and National Insurance you will owe at the end of the year, and most subcontractors on 20% end up due a refund because the deduction is taken from turnover rather than from profit — before any of your costs are accounted for.

That last point is the whole reason CIS is painful. You pay tax on money you have not yet worked out whether you kept.

Who is a contractor — including businesses that never meant to be

You are a mainstream contractor if construction is your business and you pay subcontractors to do work for you. That is the obvious case.

The one that catches people is the deemed contractor. A business with nothing to do with construction becomes a contractor for CIS purposes if its spending on construction operations exceeds £3 million in any rolling 12-month period, measured excluding VAT. Not a financial year — any rolling twelve months, checked continuously.

A retailer refitting stores, a landlord refurbishing a portfolio, a manufacturer extending a site: all can cross £3 million without anyone in the business thinking of themselves as a builder. The obligations arrive anyway — verify subcontractors, deduct, file monthly returns.

Once you are a deemed contractor you stay one until construction spending falls back below £3 million over the previous rolling twelve months. Some payments are excluded, including work on property used for your own business and small payments under £1,000 excluding VAT.

Who is a subcontractor, and which work counts

You are a subcontractor if you carry out construction work under contract for a contractor. Sole trader, partnership or limited company — the structure makes no difference to whether CIS applies.

Work inside CIS covers more than most people expect:

• Building, demolition and site preparation
• Alterations, repairs and extensions
• Installing heating, lighting, power, water and ventilation
• Decorating and painting
• Groundworks and civil engineering

Work outside CIS includes architecture and surveying, carpet fitting, delivering materials, running a site canteen, and hiring out plant without an operator. Hire it out with an operator and you are back inside the scheme.

The distinction matters because it decides whether a deduction should have been taken at all — and a contractor who deducts from work that was never in scope has taken money they had no right to.

There is a prior question that CIS itself does not answer: is this person actually self-employed? CIS applies to subcontractors, not to employees, and paying someone under CIS does not make them self-employed. If a worker turns up when told, uses the contractor's tools, takes no financial risk and cannot send a substitute, HMRC may treat them as an employee regardless of what the contract says or how they were paid. The contractor then owes PAYE and employer National Insurance on those payments, with interest, and the CIS deductions already made do not settle it. Every monthly return carries a declaration that the contractor has considered this, which is HMRC telling you plainly where it looks.

The three deduction rates

Before the first payment, a contractor must verify you with HMRC. The answer sets the rate:

The 30% rate is not a punishment HMRC applies deliberately. It is what a contractor is legally obliged to deduct when verification fails, including when you are registered but your name, UTR or National Insurance number does not match what HMRC holds. A typo produces the same outcome as never registering.

Verification is not needed before every single payment. A contractor generally does not have to re-verify a subcontractor they have already included on a return in the current tax year or the two before it. In practice that means the check bites hardest on new relationships — the first job with a new contractor is where an unregistered subcontractor discovers the 30% rate, and where a mismatched detail surfaces. It is worth confirming that a new contractor holds your details exactly as HMRC does before the first invoice rather than after the first short payment.

What the deduction is calculated on

This is where money is most often lost, and it is worth being exact.

The deduction comes off the labour element only. It is never taken from:

• Materials you paid for and supply, at the actual cost to you
• VAT charged on the invoice
• Plant hire with an operator, where the hire cost is itemised separately
• Fuel used for plant, other than for travel
• Manufacturing or prefabricating materials off site

But this only works if the invoice itemises them. A single line reading "supply and fit — £3,000" is treated as labour in its entirety, and the deduction is taken from the whole amount. Splitting the same job into labour and materials on separate lines is not a presentational preference; it decides how much of your money is withheld.

Materials must also be charged at cost. Marking them up and calling the markup materials does not work — the excess is treated as labour.

A worked payment, start to finish

A subcontractor invoices for a bathroom installation: £2,400 labour and £600 materials, itemised separately.

Registering is worth £240 on this one invoice. Across a year of similar work it is the difference between a healthy cash position and constantly waiting on a refund.

Now suppose the same job had been invoiced as a single line of £3,000 with no split. The deduction becomes £600 rather than £480 — the materials are treated as labour, and £120 that should have stayed with you goes to HMRC until you reclaim it.

Registering, and what it costs to delay

Register before you start work. Until HMRC can verify you, the contractor must apply 30%.

You need a UTR first. If you do not have one, register for Self Assessment — HMRC issues the UTR by post, typically within about ten working days, so this is not a same-week task. Companies register through their own CIS registration alongside their Corporation Tax reference.

Then register for CIS itself through HMRC online services, giving your UTR, National Insurance number and business details. Check the details you submit match HMRC's records exactly, because verification failures overwhelmingly come from mismatched names rather than genuine non-registration.

If you were deducted at 30% before registering, the money is not lost. It is still credited to you at year end — you have simply lent HMRC an extra 10% of your labour income in the meantime.

Gross payment status: the three tests

Gross payment status means contractors pay you in full and you settle your own tax at year end. For a subcontractor of any size it is the single biggest cash flow improvement available. You must pass all three tests.

The turnover test — measured over the last 12 months, excluding VAT and the cost of materials:

The business test — you do construction work, or supply labour for it, in the UK, and you run the business through a bank account.

The compliance test — you have paid your tax and National Insurance on time and filed what was due.

Note what the turnover test excludes: materials. A subcontractor turning over £45,000 of which £18,000 is materials has £27,000 for this purpose, and does not qualify.

Keeping gross payment status once you have it

Getting it is one thing. HMRC can review your compliance and withdraw the status if it slips, which puts you back to 20% deductions.

The exposure is broader than CIS itself. Late Self Assessment, late Corporation Tax, late VAT and late PAYE all count against the compliance test. A business can lose gross payment status because of a VAT return that had nothing to do with construction — and the consequence lands squarely on construction cash flow.

If your working capital depends on being paid gross, then every filing deadline across the business is a cash flow deadline, not just an administrative one.

The monthly CIS300 return

If you are a contractor you file a CIS300 every month by the 19th, covering the tax month that ended on the 5th. Each return lists, for every subcontractor paid:

• Their name and UTR
• The gross amount paid, excluding VAT
• The materials element
• The deduction made

Two things catch contractors out. A nil return is still required if you paid no subcontractors that month — silence is a missed return, not an absence of one. And the return must include a declaration that you have considered the employment status of everyone listed, because CIS does not apply to people who are actually employees.

Contractors also have to keep the underlying records — what was paid, to whom, the materials figure claimed and the evidence for it — and be able to produce them if HMRC asks. Materials are the usual point of challenge, because the figure directly reduces the deduction: a materials claim with no invoice behind it is the easiest adjustment an inspector can make.

You must also give every subcontractor a payment and deduction statement within 14 days of the tax month end. That statement is what lets them prove the deduction. Subcontractors should keep every one: if a contractor deducts and fails to pay HMRC, the statement is what supports your claim for the credit.

What late CIS300 returns cost

The penalties escalate quickly, and they apply per return:

Because these are charged per monthly return, a contractor who stops filing for a year does not face one penalty but twelve, each running its own clock. The UK tax deadline calendar lists the CIS300 dates alongside the rest of the year.

Getting the money back: sole traders and companies differ

This is the part where the two structures diverge completely, and applying the wrong route wastes months.

Sole traders and partnerships reclaim through Self Assessment. You declare the gross income and the CIS deducted separately, and the deductions are credited against your Income Tax and Class 4 National Insurance. Where deductions exceed the bill — which they often do, because 20% of turnover usually outruns the tax on profit — HMRC repays the difference after the return is filed.

Limited companies do not use Self Assessment for this. The company reclaims through its Employer Payment Summary, offsetting CIS suffered against the PAYE, National Insurance and CIS it owes as an employer each month. Any surplus left at the end of the tax year can be set against Corporation Tax or repaid.

The practical consequence: a company can recover CIS during the year, month by month, while a sole trader generally waits for the return. A company director invoicing through their company and waiting for January is waiting unnecessarily.

If a deduction was taken wrongly — from materials you itemised, from work outside the scheme, or at 30% when you were registered — raise it with the contractor first, because they are the only party who can correct their own return. A contractor who has already filed can amend it, and the corrected figure flows through to what HMRC credits you. What you should not do is quietly absorb it: the deduction statement is the evidence of what was withheld, and if the statement is wrong, the credit you eventually claim will be wrong with it. Where a contractor refuses to correct a clear error, HMRC can be asked to look at it, but the paperwork you need is the same either way — the invoice showing the split, and the statement showing what was actually taken.

The VAT domestic reverse charge

Since 1 March 2021 the domestic reverse charge applies to most construction services between VAT-registered businesses inside the CIS chain.

• The subcontractor does not charge VAT
• The contractor accounts for it on their own return, as both input and output tax
• The invoice must state that the reverse charge applies and that the customer accounts for the VAT

It does not apply where the customer is an end user — a business having work done for itself rather than supplying it on — or where the customer is not VAT registered. End users should confirm their status in writing, and that confirmation is what protects the supplier.

The reverse charge and CIS overlap but are not the same scheme. CIS decides what is deducted from your payment; the reverse charge decides who accounts for the VAT. A payment can be inside one and outside the other, which is why they are worth checking separately rather than assuming they move together. See our VAT registration guide if you are near the threshold, and the MTD for VAT guide for how returns are filed.

Where Marchant fits

Our free CIS calculator works out the deduction and the net payment for any invoice, including the labour and materials split — useful before you send an invoice, not only after you have been paid short.

In Marchant, gross invoice values and CIS deductions are recorded separately as they happen rather than reconstructed at year end, so the annual CIS figure is a number you already have when the return is due. Contractors can track subcontractor payments and what each monthly CIS300 will contain. Marchant is built on HMRC's APIs, with our listing on HMRC's recognised software list in progress ahead of the November 2026 launch.

For more on construction-specific bookkeeping see Marchant for construction businesses, pricing for what is included, or how Marchant compares to Sage if that's what you're on now.