What Is CIS? The Construction Industry Scheme Explained
If you work in trades and construction, you have probably seen money taken off your invoices before it reaches your bank account. That is CIS, the Construction Industry Scheme.
It catches a lot of people out. Some think it is a fine. Some think it is the contractor keeping their money. Neither is true. This guide explains what CIS is, who it applies to, and how it affects the money you actually take home.
What is CIS in simple terms?
CIS is an HMRC scheme that sets the rules for how contractors pay subcontractors for construction work.
When a contractor pays a subcontractor, they may have to hold back part of the payment and send it straight to HMRC. That money is not lost. It is an advance payment towards the subcontractor’s tax and National Insurance, a bit like PAYE for employees.
At the end of the year, the deductions are counted against the tax you actually owe. If too much was taken, you get the difference back.
Who does CIS apply to?
CIS covers two groups, and plenty of businesses are both.
Contractors are businesses that pay subcontractors for construction work. That includes builders, developers and property companies. Some businesses outside construction also count as contractors once they spend more than £3 million on construction in a 12 month period.
Subcontractors are businesses that carry out construction work for a contractor. That can be a sole trader, a partnership or a limited company.
A groundworks company that is paid by a main contractor, and also pays its own labour, is a subcontractor and a contractor at the same time. It has to follow both sets of rules.
CIS does not apply to employees. If someone is genuinely employed, they are paid through PAYE instead.
Private householders are not contractors. If you are doing an extension directly for a homeowner, CIS does not apply to that job.
What work is covered by CIS?
CIS covers most construction work carried out in the UK, including:
- site preparation and groundworks
- building and construction
- alterations and extensions
- repairs
- painting and decorating
- demolition and dismantling
- installing heating, lighting, power, water and drainage systems
- scaffolding erection
Some work falls outside the scheme, such as:
- the professional work of architects and surveyors
- carpet fitting (unless it is part of a wider contract)
- hiring out scaffolding or plant without labour
- delivering materials to site
- installing security systems such as burglar alarms and CCTV
If a single contract mixes construction and non-construction work, the whole contract falls under CIS.
How much is deducted under CIS?
There are three rates, and which one applies depends on your registration with HMRC.
| Your CIS status | Deduction taken |
| Registered for CIS | 20% |
| Not registered | 30% |
| Gross payment status | 0%, paid in full |
The deduction is only taken from your labour. It is not taken from:
- the cost of materials you bought for the job
- VAT
Travel and subsistence costs paid to you are treated as labour, so the deduction does apply to those.
Watch out for markup on materials. Only what you actually paid for the materials is left out. If you add a markup when you charge the materials on to the contractor, that markup is treated as labour and CIS is deducted from it.
A worked example
Say you are a CIS registered subcontractor and you invoice a contractor for:
- labour: £1,500
- materials you bought: £300
The contractor takes 20% off the labour only:
- £1,500 x 20% = £300 deduction
- you are paid £1,800 minus £300 = £1,500
If you were not registered, the deduction would be 30%, so £450 held back and £1,350 paid.
With gross payment status, you would receive the full £1,800 and pay your tax through your tax return instead.
What if you add a markup to the materials?
Say the same materials cost you £300, but you charge them to the contractor at £400. Your invoice is now:
- labour: £1,500
- materials charged: £400 (cost to you £300)
Only the £300 you actually paid is left out of the deduction. The £100 markup is taxed like labour:
- £1,900 minus £300 = £1,600 subject to CIS
- £1,600 x 20% = £320 deduction
- you are paid £1,900 minus £320 = £1,580
Keep your materials receipts. The contractor can ask for evidence of what the materials cost you.
What about scaffolding and plant hire?
Scaffolding catches a lot of people out, because the answer depends on who owns the kit and whether labour is involved.
Scaffold hired out with no labour. If a business only hires out scaffolding, and does not erect or take it down, that hire is not a construction operation. CIS does not apply.
Scaffold erected by the scaffolder. Putting up and taking down scaffolding is construction work, so CIS applies. If the same contract covers both the scaffold and the labour, the whole contract falls under CIS.
Scaffolder hires the scaffold in from a hire company. HMRC treats plant hired from a third party, including scaffolding, like materials. The actual hire cost is left out of the deduction. Any markup added on top is not.
Scaffolder owns the scaffold. No deduction is allowed for the use of your own equipment, so CIS is deducted from the whole payment for the job. The same applies to any plant you own, such as mixers or diggers, although fuel used to run the plant can still be treated as materials.
Here is how that works on a £3,000 scaffolding job, made up of £1,800 labour and £1,200 charged for the scaffold:
| Situation | Left out of the deduction | 20% CIS deducted | Scaffolder is paid |
| Scaffold hired in, costing £1,000 | £1,000 | £400 | £2,600 |
| Scaffold owned by the scaffolder | £0 | £600 | £2,400 |
If you own your scaffolding, expect more to be deducted, and make sure every deduction is claimed back on your tax return or through payroll.
What happens to the money that is deducted?
The contractor pays it to HMRC and must give you a payment and deduction statement each tax month showing what was taken. Keep every one of these. They are your proof of tax already paid.
If you are a sole trader, your CIS deductions go on your Self Assessment tax return. They are set against your income tax and National Insurance for the year. Many subcontractors have more deducted than they owe, which is why CIS refunds are common.
If you are a limited company, the deductions are set off each month against the PAYE, National Insurance and CIS the company owes HMRC. This is reported through payroll. Any amount left over at the end of the tax year can be refunded or set against Corporation Tax.
What is gross payment status?
Gross payment status means contractors pay you in full with nothing deducted. It helps cash flow a great deal, because you are not waiting until after your tax return to get money back.
To qualify you need to pass three HMRC tests:
- Business test: you carry out construction work in the UK and run the business through a bank account
- Turnover test: for a sole trader, at least £30,000 of construction turnover in the last 12 months, not counting VAT or materials. Different thresholds apply to partnerships and companies
- Compliance test: your tax returns and payments have been on time
HMRC reviews gross payment status every year. Late returns or late payments can lose it, and if it is cancelled you have to wait a year before you can apply again.
Common CIS mistakes
These are the issues our team sees most often with trades and construction clients:
- Not registering, and losing 30% instead of 20% from every payment
- Losing deduction statements, making it harder to claim the deductions back
- Materials not shown on invoices, so tax is deducted from the full amount
- Forgetting CIS on the tax return, and missing out on a refund
- Contractors not filing monthly returns, which leads to automatic penalties
Frequently asked questions
Is CIS the same as tax?
Not quite. CIS deductions are advance payments towards your tax and National Insurance. Your actual bill is worked out on your tax return, and the deductions are taken off it.
Can I get my CIS deductions back?
If more was deducted than you owe, yes. Sole traders claim through their Self Assessment tax return. Limited companies set deductions off through payroll during the year.
Does CIS apply if I work for homeowners?
No. Private householders are not contractors under CIS, so no deduction is taken on those jobs.
Do I have to register for CIS?
Contractors must register. Subcontractors do not have to, but if they do not, contractors must deduct 30% instead of 20%.
Get CIS right without the headache
CIS is one of the most common reasons trades and construction businesses overpay tax, pay penalties or wait months for money that is theirs. Brickbooks and Payroll works exclusively with trades and construction businesses, so CIS is part of our everyday work, from registration and monthly returns to claiming back every deduction you are owed.
Get your instant price in under a minute and see exactly what it costs to have your CIS handled properly.
Related reading: When to register as a CIS subcontractor | When to register as a CIS contractor
This article is general guidance based on HMRC’s published CIS guidance at the time of writing. Your own position may differ, so speak to an accountant before acting on it.