The rule most agencies miss
Labour agencies operating in the construction sector frequently assume that CIS is a concern for the workers they supply, not for the agency itself. That assumption is wrong in a significant proportion of cases. Where an agency has a contract with a main contractor to supply workers for construction operations, and those workers carry out their work under a contract with the agency, the agency is the CIS subcontractor. The deduction is made from the payment the contractor makes to the agency, not from any payment to the individual workers.
The source for this rule is the HMRC CIS Reform Manual at CISR13020 and the CIS340 guide (updated 6 April 2026), which defines subcontractors to include "a labour agency or staff bureau which contracts either to get work done with its own workforce, or to supply workers to a contractor." Separately, CIS340 section 2.12 confirms that where a worker is supplied to a contractor under a contract between the agency and the contractor, the agency is the CIS subcontractor and the contractor must apply the scheme when paying the agency.
Getting this wrong in either direction creates problems. An agency that is the CIS subcontractor but has not registered is subject to the unregistered 30% deduction rate on all payments from contractors. A main contractor that treats the individual workers as the subcontractors rather than the agency risks making incorrect deductions, issuing incorrect deduction statements, and filing incorrect CIS300 returns.
When the agency is the CIS subcontractor: the core rule
The starting point is the contractual structure. Three questions determine whether the agency is the subcontractor:
- Is there a contract between the agency and the main contractor for the supply of workers for construction operations?
- Do the supplied workers carry out their work under a contract with the agency (rather than under a direct contract with the main contractor)?
- Do the agency worker rules or off-payroll working rules not apply to the engagement?
If the answer to questions 1 and 2 is yes, and the answer to question 3 is that neither exemption applies, the agency is a CIS subcontractor. The contractor pays the agency and deducts CIS from that payment. The agency pays its own workers under PAYE. CIS does not travel further down the chain.
The diagram below illustrates the payment and deduction flow:
| Party | Pays whom | CIS deduction? | Tax treatment for workers |
|---|---|---|---|
| Main contractor | Agency | Yes: 0% / 20% / 30% depending on GPS/registered status | Not directly relevant |
| Agency | Supplied workers | No: workers paid under PAYE | Agency deducts PAYE and NIC from wages |
The contractor must verify the agency's CIS subcontractor status with HMRC before the first payment, exactly as it would for any individual or company subcontractor. Verification determines the deduction rate: 0% for GPS, 20% for registered, 30% for unregistered. For full detail on how verification works, see our guide to CIS subcontractor verification.
When the agency is NOT the CIS subcontractor: the introduction route
The agency subcontractor rule applies only when the agency has a construction contract with the main contractor. It does not apply when the agency merely introduces a worker who then enters into a direct contract with the contractor. In that scenario, CIS340 section 2.12 is explicit: the agency is not a subcontractor because no construction contract exists between the agency and the contractor. The contractor deals directly with the worker and treats the worker as the CIS subcontractor (or employee, depending on employment status).
The distinction is critical in practice. Many agencies operate on both models depending on the client: supply-under-agency-contract for some contractors, introduction-only for others. Each contract needs its own analysis.
When employment agency rules and off-payroll rules override CIS
Two sets of rules can push the engagement out of CIS entirely, regardless of the contractual structure.
Employment agency legislation (PAYE agency worker rules)
When workers supplied by an agency are treated as employees for tax and National Insurance purposes under the employment agency rules (broadly, where the worker is subject to the direction and control of the client and receives a salary-like payment from the agency), CIS should not be operated on payments to those workers. The tax obligation shifts to PAYE instead. This is the most common override in practice: agencies with directly employed workers on their payroll who are sent to construction sites are typically outside CIS on those worker-level payments.
Off-payroll working rules (IR35)
Where the off-payroll working rules apply to the engagement (broadly, where a worker would be an employee of the client if they contracted directly), payments to the agency are outside CIS scope. CIS340 section 2.12 states expressly that where off-payroll rules apply, the scheme should not be operated on those payments.
The practical consequence is that agencies need to assess each engagement individually. An agency supplying workers who are treated as employees under agency rules, or where IR35 applies, sits in PAYE territory. An agency supplying self-employed construction workers under a supply contract where neither override applies sits in CIS territory.
Obligations of an agency acting as a CIS subcontractor
Once it is established that the agency is the CIS subcontractor, the agency takes on the same obligations as any other registered subcontractor.
Registration
The agency must register with HMRC as a CIS subcontractor before the first construction payment is received. Registration is free and done online through the Government Gateway. An unregistered agency suffers a 30% deduction on all contractor payments, compared to 20% for a registered one. The 10-percentage-point gap has a direct, immediate cash-flow impact for any volume agency. For the registration process, see our guide to subcontractor verification and registration.
Receiving deduction statements
The main contractor must issue the agency a CIS payment and deduction statement each time a deduction is made. The agency collects these statements across the tax year and uses them to reconcile the CIS deductions suffered against its tax liability. As a sole trader agency, the deductions feed into the Self Assessment return. As a limited company agency, the deductions can be offset in real time via the Employer Payment Summary against PAYE/NIC liabilities, which is considerably faster than waiting for a year-end repayment.
Gross Payment Status
An agency can apply for Gross Payment Status if it meets the three qualifying tests. The business test requires the agency to carry out construction work or supply labour for construction work in the UK through a bank account. The turnover test requires net annual CIS turnover of at least £30,000 (for a sole-trader or single-director company) or £100,000 total (for a multi-director company or partnership). The compliance test requires all tax obligations to have been met on time for the past 12 months.
GPS is worth pursuing for any agency with consistent, qualifying turnover. At the standard 20% deduction rate, an agency receiving £500,000 a year from contractors suffers £100,000 in advance deductions every year. On GPS, that cash stays in the business and is settled through the tax return instead.
April 2026 GPS anti-fraud changes: what they mean for agencies
Finance Act 2026 (Royal Assent 18 March 2026) introduced new GPS obligations that apply from 6 April 2026 and are directly relevant to agencies, both those holding GPS and those engaging subcontractors of their own.
Under Finance Act 2004 ss.62A/62B (inserted by Finance Act 2026), any person who makes a payment under a construction contract knowing, or having reason to know, that a connected party has deliberately failed to comply with CIS obligations is liable to a penalty of 20% of the payment. The "knew or should have known" standard means that failure to carry out due diligence is sufficient for the penalty to apply. HMRC does not need to prove intent.
For GPS holders specifically, HMRC can now revoke GPS without advance notice where the "knew or should have known" standard is met. Loss of GPS triggers a five-year ban on reapplication (previously one year). For a large labour agency receiving £500,000 a year from contractors, losing GPS means reverting to the 20% deduction rate: a cash-flow cost of roughly £100,000 a year.
The three due-diligence steps that protect against revocation are:
- Re-verify CIS status of each subcontractor before each payment (using the HMRC online verification service).
- Companies House legitimacy check: confirm the subcontractor company exists, is active, and matches the details provided.
- Bank account name verification: confirm the account name matches the registered entity before transferring funds.
For agencies that both receive CIS deductions from contractors and make CIS payments to their own subcontractors, the due-diligence obligation runs in both directions. For a deeper look at supply-chain compliance, see our guide to CIS supply-chain compliance and due diligence.
Common mistakes and HMRC enquiry triggers
The following errors are the most frequent sources of compliance problems for agencies operating under CIS.
Not registering as a CIS subcontractor
The most costly mistake is failing to register at all. An unregistered agency suffers 30% rather than 20% on every contractor payment. Registration is a one-time, free process that immediately reduces the deduction rate and opens the path to GPS.
Treating individual workers as the CIS subcontractors
An agency that is itself the CIS subcontractor should not be asking workers to "register for CIS" as if they were the subcontractors in the chain. The CIS obligation sits at agency level. Workers employed under PAYE by the agency are paid through PAYE regardless of what site they work on.
Failing to collect deduction statements
Contractors are required to issue deduction statements to the agency for each payment made with a CIS deduction. Missing statements make it impossible to reconcile deductions suffered at year end and delay any refund or EPS offset. Agencies should request statements promptly and cross-check them against Government Gateway records.
Incorrectly applying the agency override
Assuming that because you are a "labour agency" you are always outside CIS is the mirror of the first mistake. The override applies only when employment agency rules or off-payroll rules push the engagement into PAYE. An agency with a supply contract for self-employed construction workers does not automatically benefit from those overrides.
If you are uncertain which rule applies to a particular contract, our guide to CIS employment status and the self-employed test covers the employment status analysis in detail. For deemed-contractor questions where the agency's own construction spend crosses the £3 million threshold, see our guide to deemed contractors explained.
GPS for agencies: practical considerations
Agencies that meet the three GPS qualifying tests should apply. The process is the same as for any subcontractor: apply via the HMRC online service using the Government Gateway, with the agency's UTR (or company registration number for limited companies), employer PAYE reference, and bank details.
One GPS-specific point for agencies: the turnover test measures net CIS turnover, which is the labour/construction-services element excluding VAT and materials. For a labour-supply agency this is straightforward: the entire payment received from contractors is a labour element, so the net figure typically equals the gross contractor payment minus VAT.
GPS status is reviewed annually. From April 2026, holding GPS requires ongoing compliance with the due-diligence steps described above. An agency that receives GPS and then fails to re-verify its own subcontractors, or turns a blind eye to supply-chain compliance issues, can have GPS removed immediately without advance warning under the new Finance Act 2026 provisions.