Guide to the Construction Industry Scheme (CIS) and Making Tax Digital

The Construction Industry Scheme (CIS) is a tax scheme used by contractors and subcontractors to make sure everyone is paying the correct tax on construction work. 

The CIS is unique because self-employed contractors are taxed before they’re paid, much like PAYE. Contractors deduct money from a subcontractor’s payments to contribute to their tax and National Insurance obligations. 

HMRC designed this complex scheme to stop tax evasion. If you don’t follow the rules correctly, you could face serious financial consequences.

Before we cover the rules, here’s what subcontractors need to know about Making Tax Digital for income tax Self Assessment. 

This guide covers what the CIS means for both contractors and the subcontractors they hire. Both of these could be small businesses.

• What is the Construction Industry Scheme (CIS)?
• What construction work is covered by the Construction Industry Scheme?
• How do CIS deductions work for contractors?
• How do CIS deductions work for subcontractors?

What is the Construction Industry Scheme (CIS)?

Unlike most self-employed people, those working for a contractor in the construction industry have tax and National Insurance deducted from their pay before it hits their bank account. This counts as an advance payment to HMRC for a subcontractor’s tax and National Insurance contributions.

Contractors must register for the CIS scheme, while subcontractors can choose whether they register. The contractor then pays tax to HMRC by the 22nd of each month.

The amount of tax you pay depends on whether you work as a subcontractor and if you register for the CIS scheme. You can be both a contractor and a subcontractor. This happens if you carry out building work but then need to subcontract part of the work to someone else.

For contractors, it’s important to keep accurate records of the gross amount (amount before tax) invoiced by subcontractors, as well as expenses and deductions. You must keep these for three years after the end of the tax year they relate to. If you can’t show your records to HMRC when asked, you might get a £3,000 fine.

CIS registration – who has to register for the scheme?

Contractors deduct 20% in subcontractor CIS payments if the subcontractor is registered with the CIS. This increases to 30% if the subcontractor isn’t registered.

The government says that you need to register as a contractor if either:

• you pay subcontractors for construction work
• your business doesn’t do construction work but you’ve spent more than £3 million on construction in the 12 months since you made your first payment (in this case, you’re known as a ‘deemed contractor’)

You need to register as a subcontractor if you do construction work for a contractor.

It’s possible that small businesses will fall under either one – or both – of these categories. If you fall under both, you need to register as both a contractor and a subcontractor.

What construction work is covered by the Construction Industry Scheme?

According to HMRC, all construction work is covered under CIS:

• site preparation
• alterations
• dismantling
• construction
• repairs
• decorating
• demolition

The scheme covers all business structures too, whether they’re limited companies, partnerships, or self-employed sole traders.

But some jobs aren’t covered, including:

• architecture and surveying
• scaffolding hire (with no labour)
• carpet fitting
• delivering materials
• work on construction sites that’s clearly not construction, like running a canteen or site facilities

Construction Industry Scheme exemptions

There are some situations in which CIS doesn’t apply if you’re a contractor. The government says that it doesn’t apply if your work is:

• paid for by a charity or trust
• paid for by a governing body or head teacher of a maintained school on behalf of the local education authority
• on the subcontractor’s own property and worth less than £1,000, excluding materials

To claim an exemption for work on a subcontractor’s own property, you need to get an exemption by calling the CIS helpline).

The scheme doesn’t apply to deemed contractors paying for:

• work on property for your own business (that isn’t for sale or rent)
• a construction contract worth less than £1,000 excluding materials (you need to get an exemption by calling the CIS helpline)

Employment rights under the CIS 

The CIS is about tax deductions for self-employed subcontractors and doesn’t have anything to do with employment law. A subcontractor’s employment rights are determined by their employment status and their contract. 

A subcontractor working under the CIS typically has these rights:

• contractual rights – aspects of their contract like payment terms, type of work, and contract length must be agreed
• right to invoice for their work
• responsibility for their own tax and NI – even with CIS deductions, they’re responsible for their own tax through Self Assessment
• no statutory employee benefits – they usually don’t receive paid holiday, sick pay, parental leave, minimum wage, protection against unfair dismissal, or access to workplace pension schemes from the contractor 
• control over their work – they generally have more control over how and when they do the work

VAT and the domestic reverse charge

In 2021 the government introduced the domestic reverse charge (DRC) to combat VAT fraud. Subcontractors would commit ‘missing trader’ fraud where they would charge VAT but ‘disappear’ before paying the VAT to HMRC. 

The DRC is a different way of paying VAT, that takes the responsibility away from the subcontractor. For example:   

• Normal VAT – the supplier charges VAT to customer, the customer pays VAT to supplier, and the supplier pays VAT to HMRC
• DRC – the supplier doesn’t charge VAT to the customer. Instead, the customer effectively charges themselves the VAT and pays it directly to HMRC 

The customer can then usually reclaim this VAT as input tax on their VAT return. By shifting the responsibility for VAT accounting from the supplier to the customer, the money levied from VAT never passes through the subcontractor.

When the domestic reverse charge applies

The DRC applies to standard or reduced-rate VAT services:

• where both the supplier and customer are VAT-registered in the UK
• where the payment for the supply is reported under the CIS
• the services supplied are construction operations (as defined by CIS), which includes a wide range of building, alteration, repair, and demolition work, as well as jobs like site clearance, landscaping, and scaffolding

How do CIS deductions work for contractors?

As a contractor, you need to register for CIS before you take on your first subcontractor.

How to register for CIS as a contractor

To register, you need to set up as a new employer with HMRC, who’ll then contact you with the information you need to register as a CIS contractor.

When you set up as a new employer, HMRC will set up a Contractor Scheme for you (and a PAYE Scheme, if necessary).

Working with new subcontractors

You need to ‘verify’ subcontractors with HMRC, who’ll then tell you whether they’re registered for CIS (and so which rate you need to make CIS deductions at).

If you’ve worked with a subcontractor before but haven’t included them on a CIS return in the last two tax years, you need to verify them again. You can verify subcontractors using HMRC’s service or commercial CIS software.

You must use commercial software if you’re verifying 50 or more subcontractors.

You need details including your Unique Taxpayer Reference (UTR), your HMRC accounts office’s reference number, and your HMRC employer reference.

You also need your subcontractor’s UTR, as well as their National Insurance number, if they’re a sole trader. For limited companies, you need their company name, company UTR and registration number. For partnerships, you need their nominated partner details, trading name, and partnership UTR.

Making CIS deductions when paying subcontractors

When paying your subcontractor, you need to make CIS deductions at the rate HMRC told you when verifying them.

You start with their gross payment (the total of their invoice), then take away the subcontractor’s expenses, including:

• VAT
• materials
• equipment which is now unusable (‘consumable stores’)
• fuel used, except for travelling
• equipment hired for this job (‘plant hire’)
• manufacturing or prefabricating materials

Then you make CIS deductions from that amount (at 20% or 30% – although some subcontractors may have ‘gross’ CIS status, meaning there won’t be any CIS tax deductions).

After paying subcontractors, you have to give them a payment and deduction statement within 14 days of the end of each tax month.

Filing CIS monthly returns as a contractor

You must tell HMRC about the monthly payments you make to subcontractors by sending a monthly return. You have to do yours by the 22nd of each month, otherwise you’ll get a £100 penalty. This fine could increase to £3,000 depending on how late you file.

You file returns by using the CIS online service or commercial CIS software.

If you haven’t made any payments to subcontractors in a particular month, you still have to tell HMRC (you can do this using your online account).

If you stop using subcontractors temporarily, you can make an inactivity request by contacting HMRC, which lasts for six months. You’ll also have to let HMRC know if your address changes, your business structure changes, a contractor dies, or you take on another contractor’s business.

You must also tell them if you stop trading or using subcontractors.

How do CIS deductions work for subcontractors?

While it’s not strictly mandatory to register for CIS as a subcontractor, keep in mind that registered subcontractors will have CIS deductions made at 20% rather than 30%.

You might also be able to apply for ‘gross’ payment status, meaning your contractor won’t make CIS deductions at all. You could qualify if you usually meet your tax obligations on time, you do construction work in the UK, and you meet a minimum turnover amount.

HMRC reviews gross payment status each year, so it’s important to keep up with the conditions of the scheme.

How to register for CIS as a subcontractor

You need these details:

• business or trading name
• National Insurance number
• Unique Taxpayer Reference (UTR)
• VAT registration number, if you’re VAT registered

The process is different depending on your legal structure:

• sole traders can register for CIS online, using your UTR and Government Gateway ID and password for Self Assessment (you’ll need to register for Self Assessment if you don’t have these details)
• limited companies fill in this company registration form
• partnerships fill in this partnerships registration form (HMRC will treat this registration separately to the sole trader registration)

Getting paid through CIS as a subcontractor

Your contractor needs to verify you first, so make sure you give them the same business name you used when registering, as well as your UTR.

If you’re not registered, or your contractor can’t verify you, CIS payments will be deducted at the higher 30% rate.

Your contractor needs to give you your CIS statements within 14 days of the end of each tax month. These help you work out whether you still owe tax and National Insurance – or whether you’re due a refund.

You can have some expenses on your invoice that the contractor will deduct from your gross payment before CIS deductions:

• VAT
• materials that you’ve paid for directly
• equipment which is now unusable (‘consumable stores’)
• plant hired for the job
• manufacturing or prefabricating materials

It’s important to keep accurate records for your tax return.

CIS deductions and paying tax

As your CIS deductions go towards your tax and National Insurance, this affects your overall tax liability.

Sole traders and partners who pay tax through Self Assessment should record the full invoice amounts as income, and then put CIS deductions in the dedicated section.

HMRC will work out your final bill. If you still owe tax, you need to pay it by 31 January, but it could also be that HMRC will owe you a refund.

The process is different for limited companies, who can claim back CIS deductions through the monthly payroll scheme.

Let HMRC know about any changes

You have to tell HMRC about certain changes to your business, particularly if your business structure changes. You also need to tell them about changes to your trading name, addresses, and shareholders – and be sure to let them know if you’ve stopped trading.

CIS helpline at HMRC

From the UK, you can call HMRC on 0300 200 3210 for support with the Construction Industry Scheme.

HMRC also has a digital assistant if you’ve got a general question.

The Construction Industry Scheme is a complex and detailed topic

Please only use this guide as an overview of the Construction Industry Scheme (CIS). HMRC has a lot more information on the scheme, as well as a dedicated CIS guide on its intricacies. It’s worth looking at this if you’re not sure about anything.

Small business guides and resources

• How to register as self-employed with HMRC
• Which trade earns the most – and where?
• Is Making Tax Digital replacing Self Assessment?
• Insurance for construction businesses