CIS guide for contractors and subcontractors
Written for owners of UK construction and trades companies who pay subcontractors, get paid as one, or do both in the same week. It covers who the scheme catches, what comes off a payment, when returns are due, and what changed on 6 April 2026.
The short version
- CIS covers almost all construction work done in the UK, and most building companies are contractor and subcontractor at the same time.
- Verify every new subcontractor before the first payment. The rate is 20% registered, 30% unverified, and 0% with gross payment status.
- Deductions come off labour only. Materials are taken out at direct cost, and the contractor has to check the evidence behind them.
- Returns are due by the 19th each month, and from 6 April 2026 a nil return is needed unless HMRC has been told in advance.
- HMRC chases the contractor first for underpaid deductions, so loose paperwork on site costs end up costing the paying business.
What the scheme is for
A CIS guide for contractors and subcontractors has to cover both sides at once, because most building companies in Hertfordshire and London are both. You pay three lads on one job and invoice a main contractor on another, and the rules change with the role you are in that day.
The Construction Industry Scheme makes the business doing the paying take tax off the labour part of a payment to a subcontractor and send it to HMRC. The money still belongs to the subcontractor. It sits with HMRC until it is set against their own tax bill. Run properly, CIS is a timing issue on cash. Run loosely, it becomes underpaid tax that HMRC asks the contractor to make good, with penalties on top for returns filed late or filed wrong.
This guide covers who the scheme catches, registration and verification, which rate applies to which subcontractor, what counts as materials, the monthly returns and statements, how subcontractors get their deductions back, and the changes that took effect on 6 April 2026. Rates and deadlines here are current at October 2026, and gov.uk is the place to check before you act on a specific payment.
Who the scheme actually catches
CIS applies to construction work carried out in the UK, including UK territorial waters out to the 12 mile limit. The work itself is defined widely: site preparation, groundworks, building, alterations, repairs, decorating, installation of systems within a structure, dismantling and demolition. A business based abroad that carries out construction work here is inside the scheme and has to register the same as anyone else. Work done outside the UK is outside it.
Contractor, subcontractor, or both
A contractor is any business that pays others for construction work. A subcontractor is the business doing that work. Plenty of companies are both, and the rules follow the role: contractor obligations when you pay out, subcontractor obligations when you invoice in.
Deemed contractors
You do not have to be a builder to be a contractor. Businesses outside construction are pulled in once their spend on construction passes £3 million in the previous 12 months, which catches property companies, retailers with a refit programme and manufacturers extending a unit. The spend has to be monitored as you go, not worked out at the year end. Government departments and local authorities have long sat in the same position, although payments made to local authorities and certain public bodies came out of CIS on 6 April 2026.
Who is outside it
Private householders paying for work on their own home are not contractors, so a kitchen fit for a homeowner is outside the scheme. Several site-related services sit outside too, including architecture and surveying, carpet fitting, delivery of materials, and the hire of plant or scaffolding with no labour attached.
Registration, verification and the rate
Every contractor has to register with HMRC for CIS before the first payment goes out to a subcontractor. In practice that sits alongside a PAYE scheme, and it is quick to set up. Subcontractors register too, and while registration is not compulsory for them, not registering costs an extra ten points of deduction on every invoice for as long as it lasts.
Verify before the first payment
Before you pay a subcontractor for the first time, you verify them through HMRC’s CIS online service using their name, Unique Taxpayer Reference and either their National Insurance number or company registration number. HMRC comes back with a verification number and the rate to use. You need to verify again if you have not paid that subcontractor in the current tax year or the two before it.
The three rates
- 0% where the subcontractor holds gross payment status
- 20% where they are registered for net payment
- 30% where HMRC cannot match them or they are not registered
Taking 20% off someone HMRC has not matched is one of the more common errors, and it is the contractor who makes up the difference.
Gross payment status
Gross status means being paid in full with no deduction, and it has to be applied for. HMRC looks at a business test, a turnover test (broadly £30,000 of construction turnover per director or partner, with a £100,000 alternative for companies) and a compliance test that now takes in VAT as well as PAYE and Self Assessment filing. HMRC reviews the status each year and can withdraw it, so a run of late returns is worth more than it looks.
What you deduct, and what you leave alone
The deduction applies to the labour element of a payment. Three things come out before the percentage is applied: VAT, the direct cost of materials the subcontractor has paid for, and any CITB levy where it is charged.
What counts as materials
HMRC’s test is the direct cost the subcontractor can show they paid, excluding VAT where the subcontractor is VAT registered. That covers building materials and consumables, fuel actually used in carrying out the work, the real amount paid for hired plant, and the purchase of land where it applies.
What does not count
These turn up on invoices every month and are not materials:
- fuel and mileage for travelling to site
- accommodation near the job
- skip hire and waste removal
- insurance and site welfare
- plant and tools the subcontractor already owns, such as a mini digger they bought two years ago, because nothing was hired
Checking is the contractor’s job
The regulations put the duty on the paying business to satisfy itself that the materials figure is accurate, which means asking for purchase invoices rather than accepting a round number on an application. Where a subcontractor will not provide evidence, the contractor can deduct on the full value excluding VAT, or make a reasonable estimate of the materials cost and keep the working.
This is the first thing a CIS compliance visit looks at, especially where the materials share of invoices looks high for the type of work. If the deduction was understated, HMRC comes to the contractor for the shortfall. Relief exists where the subcontractor has already declared the income and paid the tax, but it is discretionary rather than automatic, and it rarely arrives before the subcontractor has filed.
Monthly returns, statements and penalties
CIS runs on tax months that end on the 5th. The return for each month is due by the 19th, covering every subcontractor paid, the gross amount, the materials, and the tax taken off. The money itself goes to HMRC by the 22nd if you pay electronically, or the 19th if you still pay by post.
Deduction statements
Every subcontractor paid under deduction gets a statement within 14 days of the end of the tax month. It is their evidence for reclaiming the tax, and a subcontractor who cannot produce statements will struggle to get the money back. Contractors who issue these promptly get fewer phone calls in April.
Nil returns are back
From 6 April 2026, a return is required even in a month when no subcontractors were paid, unless you have told HMRC in advance that there will be no payments. The nil filing duty was dropped in 2015, which did not reduce the admin and produced late filing penalties that should never have been issued. It is now reinstated, so a quiet month still needs an action.
Late filing penalties
- one day late: £100
- two months late: a further £200
- six months late: £300 or 5% of the deductions on the return, whichever is more
- twelve months late: another £300 or 5%, and more where information has been withheld deliberately
Penalties apply per return, so a contractor who stops filing over a quiet winter can be several hundred pounds down before anyone opens the post.
Getting your deductions back as a subcontractor
If 20% is coming off your invoices, that money is yours. How you get it back depends on how the business is structured, and this is where a year’s worth of cash quietly goes missing.
Limited companies
A company reclaims CIS suffered through its payroll, by reporting the figure on an Employer Payment Summary each month. The deductions are set against the PAYE, National Insurance and CIS the company owes. If there is more CIS suffered than PAYE due, the surplus carries forward through the year, and whatever is left can be repaid or reallocated after the tax year ends. It does not go on the corporation tax return, and a company that never files an EPS can go a full year with the tax sitting at HMRC untouched.
Sole traders and partnerships
Deductions go on the Self Assessment return and come off the tax and Class 4 National Insurance for the year. For most working subcontractors that produces a repayment, provided the figures match the deduction statements.
Reconcile monthly, not in January
Match the deduction statements to your sales invoices every month. Missing statements, a contractor who used 30% because verification was never done, and payments recorded net in the bookkeeping all show up here. One more thing to check on every invoice: where both parties are CIS and VAT registered and the customer is not an end user, the VAT domestic reverse charge applies, so VAT is not charged on the invoice and the customer accounts for it instead.
What changed on 6 April 2026
Three changes matter to anyone running a contractor scheme this year.
Public bodies out of scope
Payments made to local authorities and certain other public bodies are now outside CIS. They were never the target of the scheme, and treating them as subcontractor payments created work for everyone. If your returns have included payments to a council, the treatment changes from the 2026-27 tax year.
Nil returns reinstated
As above, a month with no subcontractor payments now needs either a nil return or an advance notification of inactivity. Set a calendar reminder on the 19th rather than relying on memory in a quiet month.
A 30% penalty for deliberate non-compliance in the chain
A penalty of 30% can now be charged on CIS payments made, or CIS credits claimed, after 6 April 2026 where they are connected to deliberate non-compliance with CIS or PAYE by a connected party, and the business knew or should have known. It can land on the company and, where their actions caused the liability, jointly on an officer. Co-operating and accepting the findings can reduce it. The practical response is due diligence on labour supply: know who you are paying, keep verification records, and be careful with new intermediaries offering labour at prices that do not add up.
HMRC letters about 2025-26 rates
HMRC is writing to contractors it believes applied the wrong CIS rate to payments between 6 April 2025 and 5 April 2026. The letters carry a reference beginning CFSS and explain how to respond, including where you think the returns were right. Corrections can also be made without a letter through the CIS online service. HMRC says it aims to come back within 28 working days of reviewing what you send.
What to do next
If you are setting up a contractor scheme or tidying one that has drifted, this is the order to work in.
- Register before the first payment: Register as a contractor with HMRC before you pay anyone for construction work, and register as a subcontractor too if you invoice other builders. Subcontractor registration is what takes the rate from 30% to 20%, so it is worth doing before the next application goes out rather than after.
- Verify every subcontractor, every time: Verify through the CIS online service before the first payment, and again for anyone you have not paid in the current tax year or the previous two. Save the verification number against the supplier record. Paying someone at 20% because they said they were registered is the contractor’s risk, not theirs.
- Ask for the materials evidence: Set the expectation on day one that applications showing materials come with purchase invoices. Where evidence does not arrive, deduct on the full amount excluding VAT or record a reasonable estimate with your reasoning. It takes a minute per invoice and it is the single biggest exposure in a compliance check.
- File by the 19th, every month: Submit the monthly return by the 19th, pay by the 22nd electronically, and issue deduction statements within 14 days of the tax month end. In a month with no payments, file a nil return or notify HMRC in advance. Penalties start at one day late and stack from there.
- Reconcile what has been deducted from you: Each month, match deduction statements against sales invoices and report CIS suffered on the EPS if you trade through a company. Sole traders carry the total into Self Assessment. A company that never files an EPS leaves the money with HMRC all year while paying PAYE in full.
- Review gross status and reverse charge: If deductions are holding back cash on big jobs, check whether you meet the turnover and compliance tests for gross payment status. At the same time, check the VAT reverse charge treatment on your sales and purchase invoices, because getting that wrong distorts both the VAT return and the CIS figures.
Where CIS goes wrong
Most CIS problems we see are process problems rather than knowledge problems.
- Paying someone before verifying them: A new subcontractor starts on a Monday, invoices on the Friday, and gets paid at 20% because that is what everyone else is on. If HMRC cannot match them, the right rate was 30%, and the 10% difference is recovered from the contractor along with interest. Verification takes a few minutes.
- Treating every site cost as materials: Fuel for travelling, skips, accommodation and tools the subcontractor already owns are not materials. They go into the labour figure the deduction is calculated on. Where the materials share looks high for the trade, HMRC asks for the invoices behind it, and the contractor pays the shortfall first.
- Assuming a quiet month means nothing to file: From 6 April 2026 a month with no subcontractor payments still needs a nil return unless HMRC has been told in advance. Contractors who used to let quiet months pass will pick up penalties from the 20th. It is a two minute job and the penalty for missing it starts at £100.
- Never reclaiming the tax suffered: A company with 20% coming off every invoice can reach the year end with a substantial balance sitting at HMRC because no EPS was ever filed. Meanwhile the PAYE bill was paid in full each month. The money is recoverable, but it takes time to sort out, and the cash was needed on site.
When it is worth getting help
If you pay two or three regular subcontractors, verified, who send clean invoices with purchase receipts behind the materials, CIS is a short job each month and plenty of owners run it themselves.
It stops being a short job when the labour chain grows, when materials are claimed without evidence, when nobody has reconciled the tax suffered against the PAYE bill, when a CFSS letter arrives, or when gross payment status is at risk because filing has slipped. Those situations cost real money, and the cost usually lands on the contractor.
Egbenn runs CIS for construction companies as routine: verification before the first payment, returns filed monthly, deduction statements issued, the reverse charge checked on every invoice, and job costing built alongside the books. One construction client came in just after year one under £100,000 and is now past £500,000, running the business from his own numbers rather than accounts filed nine months late.
Frequently asked questions
Do I need to register for CIS if I use one subcontractor?
Yes. There is no minimum. Once you pay anyone for construction work, you are a contractor and you register before that first payment, verify the subcontractor and file monthly returns. The only common exception is a private householder paying for work on their own home, who sits outside the scheme entirely.
What rate do I use if HMRC cannot match the subcontractor?
30%. Verification tells you the rate, and an unmatched or unregistered subcontractor is deducted at 30% until they register and you verify again. If you use 20% instead, HMRC looks to you for the difference, so it is worth holding the first payment until verification comes back.
Is CIS deducted from materials and VAT as well as labour?
No. VAT, the CITB levy and the direct cost of materials the subcontractor paid for all come out before the percentage is applied. The contractor has to be satisfied the materials figure is genuine, which means asking for purchase invoices rather than taking the application at face value.
Do I have to file a return in a month with no payments?
From 6 April 2026, yes, unless you have notified HMRC in advance that no subcontractors will be paid that month. The nil return obligation was removed in 2015 and has now been reinstated. Missing it starts the late filing penalties, which begin at £100 one day after the 19th.
How does a limited company get its CIS deductions back?
Through payroll. The company reports CIS suffered on an Employer Payment Summary each month, and the deductions are set against the PAYE, National Insurance and CIS it owes. Anything left over after the tax year end can be repaid or reallocated. It is never claimed on the corporation tax return.
What should I do if I used the wrong CIS rate last year?
Correct it rather than wait. HMRC is writing to contractors it thinks applied the wrong rate during 2025-26, with a reference starting CFSS, and corrections can also be made through the CIS online service without a letter. Disclosing the underpayment and co-operating puts you in a better position than being found.
Other guides and tools for owners running a construction company.
Final thoughts
Most of this CIS guide for contractors and subcontractors comes down to three habits: verify before you pay, take materials out properly with evidence behind them, and file on the 19th whether or not anyone was paid. Do those and the scheme is a cash timing exercise. Skip them and it becomes tax the contractor pays twice.
The April 2026 changes make the monthly rhythm matter more, because nil months now need an action and payments connected to deliberate non-compliance elsewhere in the chain carry a 30% penalty. If your CIS, VAT and payroll are all being reconstructed at the year end, that is the thing to fix first, because it is also what stops you knowing which jobs made money.