If you're a contractor who uses subcontractors — even occasionally — the Construction Industry Scheme (CIS) applies to you. Get it wrong and HMRC can levy penalties of up to £3,000 per return, plus the unpaid tax. Here's how to stay compliant.
What is CIS?
The Construction Industry Scheme is an HMRC tax deduction scheme. When a contractor pays a subcontractor for construction work, the contractor must:
1. Verify the subcontractor with HMRC
2. Deduct tax from the payment (20% or 30%)
3. Pay the deductions to HMRC
4. File a monthly return
It's essentially a withholding tax — you collect tax on HMRC's behalf.
Who Counts as a "Contractor"?
You're a CIS contractor if you:
- Pay subcontractors more than £3 million per year for construction work, OR
- Are a builder, plumber, electrician, or similar trade that subcontracts work out
Even if you only use subbies occasionally, if the total hits the threshold, you need to register as a CIS contractor.
Who Counts as a "Subcontractor"?
Anyone you pay to do construction work who isn't on your payroll. This includes:
- Self-employed tradespeople
- Limited companies doing construction work
- Labour-only workers
It does not include employees (they go through PAYE) or professionals like architects and surveyors (they're exempt).
The Verification Process
Before making the first payment to a subcontractor, you must verify them with HMRC. This tells you their CIS deduction rate:
- 0% (gross payment status): Subcontractor is verified and pays their own tax. You pay them the full amount.
- 20% (net payment): Standard rate. Deduct 20% from the labour element and pay it to HMRC.
- 30% (higher rate): Subcontractor is unverified or not registered. Deduct 30%.
Verification is free and takes minutes through HMRC's online service.
What to Deduct
CIS deductions apply to the labour portion of payments only, not materials. If a subcontractor invoices you £2,000 (£1,500 labour + £500 materials), you deduct 20% of £1,500 = £300.
You pay the subcontractor £1,700 and send HMRC the £300.
Monthly Returns
You must file a CIS return with HMRC every month, even if you made no payments that month (nil return). The return is due by the 19th of the following month.
Late filing penalties:
- 1 day late: £100
- 2 months late: £200
- 6 months late: £300 or 5% of CIS deductions (whichever is higher)
- 12 months late: £300 or 5% of CIS deductions, plus possible £3,000 penalty
Record Keeping
Keep records for at least 3 years (HMRC recommends 6). For each subcontractor, you need:
- Verification reference number
- UTR (Unique Taxpayer Reference) or company registration number
- Gross amount, materials, CIS deduction on each payment
- Copies of all payment and deduction statements
Common Mistakes
- Not verifying before paying: If you pay a subcontractor without verifying, you must deduct at 30% (the higher rate). No exceptions.
- Deducting from materials: Only deduct from the labour element. Get invoices that clearly separate labour and materials.
- Forgetting nil returns: Even if you used no subcontractors this month, you still need to file.
- Not giving deduction statements: You must provide a written statement to the subcontractor showing the gross amount, materials, and deductions. Within 14 days of the tax month end.
CIS and VAT
CIS deductions are calculated before VAT. If a subcontractor charges £1,000 labour + £200 VAT, you deduct 20% of £1,000 (= £200) and pay them £1,000 (the £800 net labour + £200 VAT). Confusing? Yes. Get your accountant to double-check your first few payments.
How Gaffer Helps
Gaffer's Subcontractor Management add-on handles the admin:
- Store subcontractor details with UTR, verification status, and deduction rate
- Automatically calculate CIS deductions on each payment
- Generate monthly CIS returns ready for submission to HMRC
- Track insurance, certifications, and right-to-work documents
- Subcontractor portal so subbies can upload their own documents
It won't replace your accountant, but it means your records are always up to date and HMRC-ready.