The Construction Industry Scheme (CIS) sets rules for contractors and sub-contractors in the construction industry concerning the deduction and payment of Income Tax and National Insurance contributions (NICs).

The CIS applies to most construction work carried out in the UK, including preparation of a site, dismantling, demolition and construction, repairs and decorating. Certain types of work are excluded from the scheme, such as professional work carried out by architects and surveyors, carpet fitting, the delivery of materials and non-construction work on a site, such as running a canteen.

This article provides an overview of the CIS and explains who the scheme applies to, how it works, the procedures involved in registering, making payments and reporting under the scheme and the steps contractors and sub-contractors need to take (and avoid) to ensure compliance. It also briefly explains the penalties and tax implications arising from failure to comply with the rules and provides hints and tips and sources of further information.

What is the CIS?

The CIS is a statutory HMRC scheme involving a set of rules for the calculation, deduction and payment of tax and NICs owed to HMRC by contractors and sub-contractors in the construction industry. Detailed HMRC guidance on all aspects of the scheme can be accessed at

Who does the CIS apply to?

The CIS applies to contractors and sub-contractors in the construction industry, including overseas businesses that act as contractors or sub-contractors for construction work carried out in the UK. All business structures are covered by the scheme, including companies, partnerships and sole traders, but the scheme does not cover employees who are subject to Pay As You Earn (PAYE).

The definitions of contractor and sub-contractor are wider under the CIS than the generally accepted definitions of these terms.

Contractors include the following categories:

  • 'Mainstream contractors' are defined as businesses that include construction operations and pay others for work covered by the CIS; property developers; labour agencies supplying workers to contractors; and gang masters who organise construction labour.
  • 'Deemed contractors' are businesses, public bodies and other organisations that do not include construction within their core operations but spend an average of over £1 million a year over a three-year period on construction projects. Such organisations include, for example, private sector firms, public sector bodies such as local authorities, government departments, banks, housing associations, development corporations and the National Health Service.

Under the CIS, private householders who pay for work, such as extensions and repairs, to be carried out on their property, or who engage firms to construct a new-build home are not defined as contractors. Non-construction firms spending less than £1 million a year over a three-year period on construction projects are also not classed as contractors.

Sub-contractors are organisations or individuals (not including employees) that have agreed to carry out construction work on behalf of a contractor. They may do the work themselves or use employees, or they may hire other sub-contractors to carry it out for them in which case they will be both contractors and sub-contractors.

Sub-contractors who are subject to the CIS may be sole traders, people working in partnerships, companies or public bodies. They include:

  • Labour agencies supplying workers to contractors.
  • Gangmasters who organise construction labour.
  • Local authorities carrying out construction work for other people.

Work excluded from the CIS

Some construction projects are excluded from the scheme. They include:

  • Expenditure incurred by deemed contractors that relates to property used for the purposes of their own business, including leased premises.
  • Construction contracts amounting to less than £1,000 (excluding the cost of materials) entered into by deemed contractors.
  • Construction contracts amounting to less than £1,000 (excluding the cost of materials) in which a sub-contractor is paid to undertake work on property that they own or rent.
  • Work done to local authority maintained schools.
  • Payments made by charities for work done (unless the payments are made by the trading arm of the charity).

Some jobs are excluded from the scheme. They include:

  • Architecture and surveying.
  • Scaffolding hire (with no labour).
  • Carpet fitting.
  • Delivering materials.
  • Non-construction work on a site, such as running a canteen.

Go to for details about the types of work that are included under the scheme and those that are excluded.

How does the CIS work?


All new mainstream and deemed contractors must register as employers with HMRC as soon as they are about to take on their first sub-contractor. Registration is completed online, and contractors will then be sent a letter with the information they need to start working as a CIS contractor. Go to for more information about how to register as a contractor.

Sub-contractors should register with HMRC under the CIS as soon as they are about to begin working in the construction industry. Registration can be completed online, however, sub-contractors who are sole traders can also register by calling HMRC's CIS helpline on 0300 200 3210. Go to for more information about how to register as a sub-contractor.

By default, sub-contractors will be registered under the 'payment under deduction' scheme, which means that contractors will make tax deductions from payments to them at the rate of 20%. But sub-contractors who meet certain qualifying conditions may be eligible for 'gross payment status'. This means that no deductions will be made by contractors from their payments. Instead, they must make payment of all tax and NICs at the end of the tax year themselves.

If sub-contractors do not register with the CIS, contractors are obliged to make deductions from payments to them at the higher rate, which is currently 30%.

Verification and payment procedures

When making payments, the contractor first checks whether the sub-contractor is registered with HMRC under the CIS and then decides whether they also need to verify the sub-contractor's tax status. A contractor has to verify a sub-contractor's tax status if they have not already included them in a return during the current or previous two tax years.

Contractors can verify sub-contractors by:

Go to for more information about how to verify sub-contractors.

If verification is not required, the contractor must make a tax deduction from the sub-contractor's payment at the same rate at which it was made on the last occasion, unless they have been instructed by HMRC that the sub-contractor's tax status has changed since that time.

If the sub-contractor's status has to be verified, HMRC gives the contractor a verification reference number and informs the contractor whether or not they need to make tax and NIC deductions from the sub-contractor's payment and, if so, at what rate.

If a deduction is required, the contractor must calculate and make the deduction, and then make the net payment to the sub-contractor, also giving them a payment and deduction statement. For information on what a statement must include, go to A downloadable form to complete and give to sub-contractors is available from HMRC (

If a gross payment has been made to a sub-contractor it is best practice to give them a payment statement, although this is not mandatory.

Payments and returns to HMRC

When contractors register with HMRC, a CIS payment scheme is set up to enable them to pay HMRC the deductions that they have made. Payments must be made monthly or quarterly.

For more information about how and when to pay deductions to HMRC, go to

Contractors must also submit monthly returns, including details of their sub-contractors, and of payments and deductions made, as well as a declaration that contractors have considered and verified the tax status of all sub-contractors.

Contractors must still file a return for months in which they have made no payments to sub-contractors. However, contractors who know they are not going to make any payments to sub-contractors for up to six months can ask for their scheme to be made inactive. Go to for more information.

Record keeping

Contractors making payments to sub-contractors must record details of the gross amount of each payment (excluding VAT) and the amount of any deduction. If the sub-contractor's invoice included any material costs in addition to their charges for the work they have done, the contractor must also record those material costs.

Records must be kept for at least three years after the end of the tax year they relate to.

Reporting changes

Contractors and sub-contractors must both report certain changes in their business to HMRC.

Changes that contractors must report to HMRC:

  • Change of private or business address.
  • A decision to stop using sub-contractors temporarily or permanently, for example because employees paid under PAYE are being used instead.
  • Any change in the business structure, for example from sole trader to private limited company.
  • Ceasing to trade or death of the contractor.

Changes that sub-contractors (or their agents) must report include:

  • Change of business ownership or structure, (eg, a change from sole trader to private limited company). This will usually require reregistering with the CIS.
  • Change of control in a 'close company', ie one that is under the control of five or fewer persons. HMRC must be informed within 30 days of any change in control of the company (through a transfer of shares for example), or gross payment status may be withdrawn.
  • Change of trading name.
  • The addition of shareholders.
  • Change of business, registered office or private address.
  • Ceasing to trade.
  • The death of the sub-contractor.

Tax issues

Contractors also have to complete their own tax returns, either as self-employed individuals or as companies. If they also act as sub-contractors, any deductions made from payments to them for tax and NICs will be offset against their final tax bill.

Sub-contractors must register with HMRC as sole traders, as partners or as limited companies and complete tax returns annually. Sole traders and partners must complete a self-assessment return, showing payments and any deductions made by contractors. Deductions that have already been made will be credited to their final tax and NIC bills. Sub-contractors trading as limited companies must claim back any deductions through the company's payroll scheme.

Using tax agents

Tax agents such as accountants can deal with CIS matters on behalf of contractors but must first be formally authorised by HMRC. Agents can register online and carry out various agreed tasks including verification of sub-contractors and filing CIS returns. For more information, go to

Penalties for non-compliance with the CIS

Contractors who are late in filing monthly returns will be charged a penalty, ranging from £100 for returns that are one day late to £3,000 or 100% of the CIS deductions on the return, (whichever is higher) for returns that are more than 12 months late.

Penalties are also charged for negligent or intentional errors on monthly return forms and a penalty of £3,000 may be charged if a contractor provides the wrong employment status for a sub-contractor on a monthly return.

Hints and tips

  • HMRC will inform the contractor during the verification process whether to pay the sub-contractor net or gross.
  • The deduction made from payments to sub-contractors is made from the part of the payment that excludes the cost of materials incurred by the sub-contractor.

Useful publications

'Construction Industry Scheme: A Guide for Contractors and Subcontractors (CIS 340)'

Useful contacts

HMRC is the UK's tax, payments and customs authority. It administers statutory payments and collects tax and National Insurance contributions. It provides webinars about CIS for contractors and sub-contractors.
Tel: 0300 200 3210 (Construction Industry Scheme helpline)
Tel: 0300 200 3200 (Employer helpline)