The Construction Industry Scheme
CIS Compliance Guide 2026.
Contractor or subcontractor, the CIS applies to you. This guide covers registration, verification, deduction rates, monthly returns, and the steps that protect Gross Payment Status.
What Is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a mandatory set of HMRC rules that governs how payments between contractors and subcontractors in the construction industry are handled for tax purposes.
Under CIS, contractors must deduct tax at source from payments to subcontractors (unless the subcontractor holds Gross Payment Status) and pay those deductions directly to HMRC. The subcontractor then reclaims the deductions against their own tax liability.
The scheme applies to all construction operations in the UK, not just building work, but also site preparation, decorating, installations (heating, lighting, plumbing, ventilation), civil engineering, and demolition.
Contractor Obligations
A business carrying out construction work must normally register as a CIS contractor before paying subcontractors for construction operations; there is no general £1,000 annual threshold. A business outside construction can become a deemed contractor if construction expenditure exceeds £3 million in a rolling 12-month period. Specific exclusions can apply, including some work on a non-construction business's own premises.
- Register with HMRC as a contractor, you must do this before making any payments to subcontractors.
- Verify new subcontractors before payment and reverify returning subcontractors absent from CIS returns in the current and previous two tax years. HMRC confirms the rate (0%, 20%, or 30%).
- Make the correct deductions after excluding VAT charged and qualifying direct costs paid by the subcontractor. Materials mark-ups remain subject to deduction.
- Issue payment and deduction statements to subcontractors within 14 days of each tax month end.
- File a monthly CIS return to HMRC by the 19th of every month.
Which CIS rate should you use?
Use HMRC's verification result and any subsequent rate-change notice. Registration alone does not establish the rate. When checking an earlier payment, use the rate that applied on its payment date, supported by the verification record and the timing of any notified change.
| Registration Status | Deduction Rate | Effect on Subcontractor |
|---|---|---|
| Gross Payment Status (GPS) | 0% | Paid in full, no deduction |
| Registered (standard) | 20% | 20% of the amount subject to CIS is deducted; claim route depends on business structure |
| Unregistered or unable to be verified | 30% | 30% of the amount subject to CIS is deducted; follow HMRC verification and rate notices |
Which materials and plant costs can be excluded?
Exclude VAT charged, then qualifying direct costs the subcontractor has paid for the contract. Use actual materials costs and evidenced third-party plant hire, not mark-ups or a notional charge for owned plant. Qualifying fuel and consumables can be allowed; travelling costs remain subject to deduction. Keep invoices or receipts supporting the split. Our CIS service explains the calculation and shows a materials mark-up example.
Monthly CIS Returns
A CIS return is due by the 19th after the tax month ends. For example, payments from 6 May to 5 June are reported by 19 June, including payments made gross. If no subcontractors were paid, file a nil return or make an inactivity request where you have temporarily stopped using subcontractors.
Late Filing Penalties
Late-return penalties start at £100 for one day late, with a further £200 after two months. At six and twelve months, further penalties are normally £300 or 5% of the deductions on the return, whichever is higher. More serious failures can attract higher penalties. These are not bands based on subcontractor headcount. A contractor's late return does not automatically cancel its subcontractors' gross payment status.
Gross Payment Status (GPS)
Gross payment status (GPS) means payment without CIS deductions. If £200,000 of annual payments is wholly subject to deduction after VAT and qualifying costs are excluded, the 20% rate would withhold £40,000. Gross payment status changes when you receive that cash, not the final tax due. Companies can use deductions through payroll during the year; they do not always wait for a year-end refund.
To qualify, you must pass three HMRC tests:
Business Test
You carry out construction work in the UK, or provide labour for it, and run the business through a bank account.
Turnover Test
Usually £30,000 net construction turnover for a sole trader, £30,000 per partner or relevant company person, or £100,000 for the whole partnership or company over the previous 12 months. Close companies include beneficial shareholders as well as directors, counting each person once.
Compliance Test
HMRC checks the relevant filing and payment obligations over the previous 12 months, including VAT. Limited late-filing and payment tolerances apply.
HMRC reviews Gross Payment Status annually. Limited tolerances and reasonable excuses can affect the outcome, so a single late return or payment does not invariably cancel it. For companies, HMRC reviews the company itself. In the normal annual-review process, HMRC gives reasons and an opportunity to respond, with an appeal route if status is withdrawn. Our management accounts include a tax compliance calendar specifically designed to protect Gross Payment Status for construction clients.
Reclaiming CIS Deductions
For sole traders and individual partners, CIS deductions are claimed through Self Assessment against Income Tax and National Insurance. Record income before deductions and reconcile the deduction statements; partnership deductions are allocated to the partners.
For limited companies, report cumulative CIS deductions through an Employer Payment Summary (EPS) under the company payroll scheme. Credit is used against PAYE, National Insurance and CIS deductions payable as a contractor, with unused amounts carried forward within the same tax year. Reconcile any year-end surplus for a repayment claim once the required returns are filed. HMRC can allocate a repayment to other tax owed, but deductions must not be claimed through the Corporation Tax return. Our CIS deductions service explains the records and claim process.
CIS & IR35 Overlap
A common misconception in construction is the assumption that because you are "CIS registered" and file CIS returns, your subcontractors are automatically self-employed for tax purposes. This is not the case.
IR35 is an entirely separate piece of legislation that assesses whether a worker is genuinely self-employed or is effectively an employee. A subcontractor who works exclusively for you, uses your tools, follows your schedule, and has no financial risk of their own may be caught by IR35, regardless of their CIS registration. The consequences include employer's NIC liability, PAYE back-payments, and potential penalties going back several years.
Official HMRC & Government Sources
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HMRC: What is the Construction Industry Scheme?
Overview of CIS, who it applies to, contractor and subcontractor obligations, and how to register.
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HMRC: CIS deductions and subcontractor payments
Apply the HMRC-confirmed rate after excluding VAT charged and qualifying direct costs.
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HMRC: CIS guide for contractors and subcontractors
Verification records, payment-status changes, return corrections and gross payment status tests.
CIS returns handled before the deadline.
We handle subcontractor verification, monthly CIS filings, deduction calculations, and GPS compliance monitoring as part of our construction accounting service. You focus on building, we handle HMRC.
Book a Construction Tax ReviewFrequently Asked Questions
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) covers payments for construction work. Contractors verify subcontractors with HMRC and use the confirmed payment status: gross payment at 0%, or deductions at 20% or 30%. They report payments on monthly returns and issue payment and deduction statements where deductions are made.
What are the CIS deduction rates?
Use the rate HMRC confirms: 0% for gross payment status, 20% at the standard rate, or 30% if the subcontractor is unregistered or cannot be verified. A subcontractor saying they are registered is not enough to apply 20%. Keep the verification result and follow subsequent HMRC rate-change notices. For an earlier payment, check the evidence and rate that applied when you paid.
How do I get Gross Payment Status?
HMRC checks the business, turnover and compliance tests. Run the UK construction business through a bank account. Net construction turnover over the previous 12 months normally needs to be £30,000 for a sole trader, £30,000 per partner or relevant company person, or £100,000 for the whole partnership or company. Close companies count beneficial shareholders as well as directors. Limited compliance tolerances apply; one late return does not automatically cancel status.