What is CIS — and why does it affect your pay?
The Construction Industry Scheme (CIS) is an HMRC system that requires contractors to withhold tax from payments to subcontractors and pay it directly to HMRC. The deduction is not a penalty — it is an advance payment of your Self Assessment income tax and National Insurance. You reclaim any overpayment when you file your annual return.
If you are a subcontractor, your contractor is legally required to deduct CIS tax before paying your invoice. The rate depends on your registration status with HMRC.
Who does CIS apply to?
You are a contractor if you pay subcontractors for construction work — including property developers, main contractors and businesses that spend over £3 million on construction work in any 12-month rolling period (even if construction is not their primary trade).
You are a subcontractor if you carry out construction work under contract for a contractor — whether you operate as a sole trader, partnership or limited company.
Construction work within CIS scope includes: building and demolition, repairs and alterations, decorating, installing fixtures (plumbing, electrics, heating, ventilation), groundwork, and civil engineering. It does not include pure architecture, surveying or equipment hire without an operator.
The three CIS deduction rates
When a contractor pays a subcontractor, they must first verify them with HMRC. The result determines the deduction rate:
| Status | Deduction rate | Who qualifies |
|---|---|---|
| **Gross payment** | 0% | Registered subcontractors with a clean compliance record, verified turnover above the threshold and no outstanding returns. Applied for online at HMRC. |
| **Standard (net)** | 20% | Subcontractors who are registered for CIS with HMRC and pass verification. |
| **Higher rate** | 30% | Subcontractors who cannot be verified — either not registered or whose details do not match HMRC records. |
The deduction applies only to the labour element of your invoice. Materials you supply and invoice separately are exempt — but they must be clearly itemised.
### Example
Invoice: £2,400 labour + £600 materials
- Labour £2,400 × 20% CIS = £480 deduction
- Materials £600 — no deduction
- You receive: £2,400 − £480 + £600 = £2,520
- HMRC receives: £480 (credited against your annual tax bill)
How to register for CIS
Subcontractors must register before they start work — otherwise contractors are required to apply the 30% unverified rate immediately.
- 1Log in to HMRC Online Services with your Government Gateway credentials
- 2Navigate to CIS → Register as a subcontractor
- 3Provide your UTR (Unique Taxpayer Reference), National Insurance number and business details
- 4HMRC confirms your gross or net payment status
If you do not yet have a UTR, register for Self Assessment first. HMRC issues a UTR within 10 business days. Do not start work without it if you want to avoid the 30% rate.
Applying for gross payment status (0% deduction)
Gross payment status eliminates cash flow pressure for established subcontractors. To qualify, you must:
- Have been registered for CIS for at least 12 months
- Have an annual turnover above the threshold (£30,000 for sole traders; proportionally higher for partnerships and companies)
- Have filed all tax returns and paid all taxes on time for the previous 12 months
HMRC reviews gross payment status annually. Any missed return or late payment gives HMRC grounds to revoke it and move you back to the 20% standard rate. Staying on top of Self Assessment and VAT is therefore directly connected to your CIS cash flow.
The monthly CIS300 return — contractor obligations
If you are a contractor, you must file a CIS300 monthly return by the 19th of each month, covering all subcontractor payments in the previous tax month (6th of the prior month to the 5th of the current month).
Each return must include: - Each subcontractor's name and UTR - The gross amount paid (excluding VAT) - The materials element (if separately invoiced) - The CIS deduction made
Missing the deadline triggers an automatic £100 penalty, rising to £200 after two months and £300 after three, with further escalating penalties after that. Set a recurring reminder for the 15th of each month so you have time to file before the 19th. See the UK tax deadline calendar for all CIS300 dates for 2026.
CIS and Self Assessment
At year-end, your Self Assessment return calculates your total income tax and Class 4 NI liability for the year. CIS deductions already withheld are credited against that total.
If total CIS deductions > your tax liability → HMRC repays the difference.
This means most subcontractors on the standard 20% rate receive a tax refund — but only if they file Self Assessment on time and claim the deductions properly. You must declare the gross CIS income and the deductions withheld separately on your return.
For limited companies, the company's Corporation Tax return claims the CIS deductions as a credit against CT. If the deductions exceed the CT bill, the company can offset the surplus against employer PAYE and NI payments.
CIS and the domestic VAT reverse charge
Since March 2021, the domestic reverse charge applies to most construction services supplied between VAT-registered businesses in the CIS chain:
- The subcontractor (supplier) does not charge VAT on in-scope services
- The contractor (customer) accounts for VAT on their own return
- The invoice must carry the wording: *"Reverse charge: customer to account for VAT to HMRC at the applicable rate"*
The reverse charge does not apply to end users (businesses that are not themselves contractors or subcontractors), or to non-VAT-registered customers. Materials-only supplies are also outside the reverse charge.
Getting this wrong — charging VAT where the reverse charge should apply, or not charging where it should not — creates VAT compliance risk. If you are unsure, check with your accountant before issuing the invoice.
How Finovo handles CIS
Finovo's free CIS deduction calculator calculates the exact net and deduction for any invoice in seconds — including the split between labour and materials. For contractors, Finovo tracks subcontractor payments and CIS300 obligations and reminds you before the 19th deadline. See Finovo for construction businesses for the full CIS toolkit.
For subcontractors, Finovo records gross invoice amounts and CIS deductions separately throughout the year. At Self Assessment time, your accountant has a precise annual CIS deduction figure — no year-end scramble matching contractor statements to invoices.
Start a free 60-day trial — no payment card required.