If you work in the UK construction industry, understanding the Construction Industry Scheme (CIS) is an essential part of staying compliant with HMRC.
CIS affects thousands of contractors and subcontractors across the UK, but there is still plenty of confusion about who needs to register, how much tax should be deducted, when monthly returns need to be submitted and how subcontractors claim CIS deductions back.
With the rules applying in the 2026/27 tax year, now is a good time to make sure your business is handling CIS correctly.
What is the Construction Industry Scheme?
The Construction Industry Scheme is a system operated by HM Revenue & Customs that regulates payments made by contractors to subcontractors carrying out construction work.
Under CIS, a contractor may be required to deduct money from payments made to a subcontractor and pass those deductions to HMRC.
Importantly, CIS deductions are not the subcontractor’s final tax bill. They are advance payments towards their tax and National Insurance liabilities.
Who needs to register for CIS?
You must register as a contractor if you pay subcontractors to carry out construction work.
CIS can also apply to businesses that are not primarily construction businesses. A business must register as a contractor if it spends more than £3 million on construction work during the 12 months following its first payment.
Subcontractors should register for CIS if they carry out construction work for a contractor. This can include sole traders, partnerships and Limited Companies.
Registration is particularly important because an unregistered subcontractor will normally have deductions taken at a higher rate.
CIS deduction rates in 2026
There are currently three possible CIS payment rates:
20% – Standard CIS deduction
This normally applies when the subcontractor is registered for CIS and has been successfully verified by the contractor.
30% – Higher CIS deduction
This generally applies when the subcontractor is not registered or cannot be successfully verified.
0% – Gross Payment Status
Subcontractors who qualify for Gross Payment Status (GPS) can receive their payments without CIS deductions. They remain responsible for paying the appropriate tax themselves.
CIS is not simply 20% of the entire invoice
This is an important point for both contractors and subcontractors.
The CIS deduction is not necessarily calculated on the full invoice value.
Before calculating the deduction, certain amounts can be excluded, including VAT and qualifying costs such as materials purchased directly by the subcontractor, plant hire for the job, consumable stores and certain manufacturing or prefabrication costs.
For example, if a subcontractor invoices for labour and materials, the CIS deduction may apply only to the relevant amount remaining after qualifying costs have been excluded.
Contractors should therefore make sure that materials and other qualifying costs are recorded correctly and may request evidence such as receipts.
Responsibilities for CIS Contractors
Being registered as a CIS contractor creates a number of ongoing responsibilities.
1. Register before using your first subcontractor
A business that falls within the contractor rules should register for CIS before taking on its first subcontractor.
2. Check employment status
Before treating someone as a subcontractor, you need to consider whether they are genuinely self-employed.
Simply calling somebody a subcontractor does not automatically make them one for tax purposes.
Contractors must declare on their CIS return that the employment status of the subcontractors has been considered. Incorrectly declaring employment status can result in a penalty of up to £3,000.
3. Verify subcontractors with HMRC
Before paying a new subcontractor, contractors generally need to verify them with HMRC.
HMRC will confirm whether the subcontractor is registered and tell the contractor whether to:
deduct 20%, deduct 30%, or pay the subcontractor gross.
A subcontractor previously used may need to be verified again if they have not appeared on a CIS return in the current or previous two tax years.
4. Calculate CIS deductions correctly
Contractors are responsible for calculating the correct deduction and paying the remaining amount to the subcontractor.
They must also maintain records showing payments, qualifying material costs and deductions.
5. Provide CIS Payment and Deduction Statements
Where deductions are made, the contractor must provide the subcontractor with a Payment and Deduction Statement.
This must normally be provided within 14 days after the end of the relevant tax month.
For example, for the tax month running from 6 May to 5 June, the statement must be provided by 19 June.
6. Submit CIS returns every month
Contractors must report payments made to subcontractors through a monthly CIS return.
The deadline is the 19th of each month following the end of the relevant CIS tax month.
For example:
6 May – 5 June → CIS return deadline: 19 June
The return includes information about subcontractors, payments and deductions and requires declarations concerning verification and employment status.
Important change from 6 April 2026 – Nil Returns
One particularly important rule for contractors in 2026 concerns months where no subcontractors have been paid.
From 6 April 2026, the obligation to file a nil CIS return has been reinstated for mainstream contractors.
If you have not paid any subcontractors during the relevant period, you should either:
submit a nil return, or
notify HMRC that you have temporarily stopped using subcontractors by making an inactivity request.
Failing to do either can result in a penalty.
7. Pay CIS deductions to HMRC
CIS deductions collected from subcontractors must also be paid to HMRC.
For businesses paying monthly, payment is generally due by:
22nd of the following month when paying electronically
or
19th when paying by post.
HMRC can charge interest and penalties for late payments.
What happens if you submit your CIS return late?
HMRC operates a penalty system for late monthly CIS returns.
Current penalties include:
1 day late – £100
2 months late – £200
6 months late – £300 or 5% of the CIS deductions shown on the return, whichever is higher
12 months late – a further £300 or 5% of the CIS deductions, whichever is higher
More serious or deliberate failures can result in additional penalties.
For contractors processing multiple subcontractors every month, poor CIS administration can therefore become expensive very quickly.
What CIS means for Subcontractors
If you’re working as a subcontractor, your responsibilities are different.
When you begin working for a contractor, you should provide the same information you used when registering for CIS, including your UTR and correct legal or trading name, so the contractor can verify you.
If you’re registered and successfully verified, deductions will normally be made at 20%.
If you’re not registered or cannot be verified, deductions will normally be 30%.
Keep every CIS statement
Don’t throw your CIS statements away.
Your contractor should provide statements showing how much you were paid and how much CIS was deducted.
These documents are important evidence when reporting your tax and claiming credit for CIS deductions. HMRC may request them if there is a discrepancy.
Can subcontractors get a CIS tax refund?
Potentially, yes.
But CIS does not automatically mean you are entitled to a refund.
For a sole trader or partner, CIS deductions are entered on the Self Assessment tax return together with the gross income received.
HMRC calculates the actual tax liability and then takes the CIS deductions already paid into account.
If you’ve paid more through CIS deductions than your final liability, you may receive a refund. If the deductions were not enough to cover your final liability, you will still have tax to pay.
This is why accurate bookkeeping and keeping records of every CIS deduction is so important.
What about Limited Companies working under CIS?
The process is different for Limited Companies.
If your company has CIS deductions taken from payments it receives, these are generally dealt with through the company’s PAYE scheme and Employer Payment Summary (EPS).
They should not simply be claimed through the Corporation Tax return.
HMRC specifically warns that using the Corporation Tax return incorrectly for CIS deductions can result in penalties.
This is an area where mistakes are particularly easy to make if a company is simultaneously:
- receiving payments as a subcontractor,
- paying its own subcontractors,
- running payroll,
- and accounting for CIS deductions.
Common CIS mistakes to avoid
Some of the problems we regularly see in CIS accounting are surprisingly simple: using the wrong deduction rate, failing to verify a subcontractor, calculating CIS on the wrong invoice amount, losing deduction statements, missing monthly returns, forgetting nil returns, incorrectly treating workers as subcontractors and failing to reconcile CIS records with bookkeeping and payroll.
For contractors, it is also important to remember that CIS registration does not determine whether someone is genuinely self-employed. Employment status needs to be considered separately.
Good CIS record keeping makes everything easier
CIS should not be treated as paperwork that is dealt with once a year.
Contractors should reconcile payments and deductions every month, while subcontractors should make sure the amounts shown on their CIS statements match the money actually received.
Doing this regularly makes it much easier to identify missing deductions, incorrect rates or discrepancies before they become a bigger problem with HMRC.
Need Help with CIS?
At Lucas Prestige Accountants, we support contractors, subcontractors, sole traders and Limited Companies working throughout the UK construction industry.
We can assist with CIS registration and subcontractor verification, monthly CIS returns, CIS deduction calculations, bookkeeping, Self Assessment, Limited Company CIS deductions and refunds, payroll and HMRC correspondence.
Whether you employ several subcontractors every month or you’re a self-employed tradesperson having CIS deducted from your payments, getting the system right can save time, reduce the risk of penalties and ensure that you do not pay more tax than necessary.
Need help with CIS? Speak to Lucas Prestige Accountants and make sure your construction business stays compliant with HMRC.
Lucas Prestige Accountants
☎️ 0161 398 0750
📱 07479 611 726
✉️ info@lucasprestigeaccountants.com
🌐 www.lucasprestigeaccountants.co.uk