What CIS is, in plain English
The Construction Industry Scheme, almost always shortened to CIS, is the set of HMRC rules that governs how money moves between businesses in UK construction. Its mechanism is simple to state: when a contractor pays a subcontractor for construction work, the contractor must hold back a percentage of the payment and send it to HMRC, rather than paying the subcontractor in full. That withheld amount is an advance towards the subcontractor's eventual Income Tax and National Insurance, not a separate or additional tax.
This is the point that trips most people up, so it is worth fixing early. A CIS deduction is money on account. It is not the final tax bill, and it is not lost. At the end of the tax year the subcontractor totals up what has been deducted across all their jobs, sets it against the tax they actually owe once their expenses and allowances are counted, and reclaims anything taken in excess. For the great majority of registered subcontractors there is an excess, which is why CIS and tax refunds go hand in hand.
CIS is a UK-wide scheme. The deduction rules apply to construction work in England, Wales, Scotland and Northern Ireland alike. It sits alongside the rest of the tax system rather than replacing it: a subcontractor still files a Self Assessment return (or a company still files Corporation Tax), and CIS simply changes the timing of when some of that tax is collected. Throughout this guide the figures are for the 2026/27 tax year (6 April 2026 to 5 April 2027) unless a date is given.
Why CIS exists
Construction has long been a sector of short engagements, mobile labour and cash payments, which historically made it easy for income to go unreported. CIS was designed to collect tax at source on construction payments, in much the same way PAYE collects tax from employees, but adapted to a workforce that is largely self-employed and moves between sites and contracts.
By making the paying party deduct and report, HMRC gets a running record of who paid whom, and a steady stream of tax in advance, rather than waiting until a self-employed subcontractor files a return many months later. That is the core trade-off built into the scheme: the contractor takes on administrative duties (verification, deductions, monthly returns), and in return HMRC has visibility and early collection. For the subcontractor it means tax is taken before they have a chance to spend it, which is a discipline, but it also means they routinely overpay and have to claim the difference back.
Who is a contractor and who is a subcontractor
CIS describes two roles in a payment, not two fixed types of business. The contractor is whoever pays for construction work to be done. The subcontractor is whoever does the work and gets paid. The duties of the scheme attach to the role: contractors deduct, report and verify; subcontractors have deductions taken from what they are paid.
The complication, and it catches a lot of people, is that one business is frequently both at once. A jobbing builder paid by a main contractor is a subcontractor for that income, but the moment they pay a labourer or a plumber to help on the job, they become a contractor for that payment and pick up the contractor's duties. If that describes you, you must register in both capacities, and you will be deducting CIS from the people below you while having CIS deducted from the money coming in.
Deemed contractors: the £3 million trap
Mainstream construction firms know they are contractors. The less obvious case is the deemed contractor. A business whose trade is not construction at all, but which spends £3 million or more a year on construction work, is pulled inside CIS and must operate the scheme on those payments. This catches property developers, large retailers, manufacturers, housing associations and similar organisations that commission a lot of building or refurbishment.
The £3 million is measured on construction spend, and once a business crosses it the full machinery applies: it must register, verify the subcontractors it pays and file monthly returns. It is a commonly missed obligation precisely because the businesses concerned do not think of themselves as part of the construction sector. From 6 April 2026 there is one welcome carve-out: payments to local authorities and public sector bodies are fully exempt from CIS under new Regulation 24ZA, so a contractor on public sector work neither deducts on those payments nor includes them in its returns.
The three deduction rates and the labour-only base
There are three CIS deduction rates, and which one a subcontractor suffers depends on their registration status, which the contractor checks by verifying them with HMRC before the first payment.
| Subcontractor status | Deduction rate | What it means |
|---|---|---|
| Gross Payment Status (GPS) | 0% | Paid in full, settles all tax later through their own return |
| Registered subcontractor | 20% | The standard rate once registered with HMRC for CIS |
| Unregistered subcontractor | 30% | Applied where the subcontractor is not registered or HMRC cannot match them |
The 10-point gap between 20% and 30% is the everyday reason registration matters, and the further jump down to 0% is why established businesses apply for Gross Payment Status. But before any rate is applied, there is a rule that governs the whole calculation.
CIS deductions apply to the labour element only. The cost of materials is excluded. This is the most commonly misunderstood part of the scheme, and getting it wrong costs subcontractors real money. The deduction is calculated on the labour and construction-services part of an invoice. The cost of materials the subcontractor buys for the job, together with VAT, plant hire, the fuel to run that plant and certain other direct costs, is taken out of the figure before the percentage is worked out.
A worked example
Take a registered subcontractor who invoices £1,000 for a job: £600 of labour and £400 of materials they bought in. The 20% is applied to the £600 labour only, not the £1,000 total.
| Invoice item | Amount | In the deduction base? |
|---|---|---|
| Labour | £600 | Yes |
| Materials | £400 | No (excluded) |
| CIS deduction at 20% of £600 | £120 | |
| Paid to the subcontractor (£1,000 less £120) | £880 | |
| Paid to HMRC by the contractor | £120 |
If the same subcontractor were unregistered, the rate would be 30% of the £600, so £180 deducted and £820 paid over. If the contractor wrongly applied the rate to the full £1,000, the registered subcontractor would lose £200 instead of £120, money they would then have to wait to reclaim. Splitting labour and materials clearly on every invoice is therefore not a formality; it directly controls how much is withheld. We go deeper into the mechanics, the edge cases and how to evidence the split in our guide to CIS deduction rates explained.
Registration: how it works on both sides
Registration is the gateway to the whole scheme, and it works differently depending on which role you are in.
Contractors must register before they pay their first subcontractor. There is no optional element here: if you are going to pay for construction work and you fall within the scheme (including as a deemed contractor on £3 million-plus of construction spend), you register first. Registration sets you up to verify subcontractors and file the monthly returns described below.
Subcontractors are not legally obliged to register, but it is practically essential. The reason is the rate table above: stay unregistered and you suffer 30%, register and it drops to 20%. That 10-point difference is taken from every labour payment all year, so it adds up quickly, and the registration itself is straightforward. There is no good reason for a working subcontractor to leave themselves on the 30% rate. Our step-by-step walkthrough covers exactly what HMRC asks for and how to avoid the verification mismatches that bump people onto 30% by accident, in how to register for CIS as a subcontractor.
Verification and monthly returns: the contractor's side
Once registered, a contractor has two recurring duties. The first is verification. Before paying a new subcontractor, the contractor checks the subcontractor's status with HMRC, which returns the rate to apply (0%, 20% or 30%). Verification is what determines the rate; it is not optional and it is the contractor's responsibility to get it right.
The second is the monthly return, the CIS300. A contractor reports every payment made to subcontractors in a tax month, and the deductions taken, on a CIS300 that must be filed by the 19th of the following tax month. The deducted money is paid to HMRC by the 22nd of that month electronically (the 19th if paying by cheque). Tax months run to the 5th, so the month ending 5 May is reported by 19 May.
Nil returns are mandatory again from April 2026
A change that is already catching contractors out: from 6 April 2026 the nil return is mandatory again. If a contractor makes no payments to subcontractors in a tax month, it must still file a nil CIS300 (or notify HMRC that it is inactive). This obligation was removed in 2015, which is why many contractors and even some software setups assumed a quiet month meant nothing to file. It is back, and the late-filing penalties bite quickly:
| How late | Penalty |
|---|---|
| 1 day late | £100 |
| 2 months late | £200 |
| 6 months late | £300 or 5% of the CIS liability, whichever is higher |
| 12 months late | £300 or 5% of the CIS liability, whichever is higher; up to £3,000 or 100% where information is withheld deliberately |
Because these penalties stack across every month missed, a contractor who simply stops filing during a slow quarter can rack up several hundred pounds for returns that would have shown nothing due. The reinstated nil-return rule is exactly the kind of obligation that slips past a firm running its own payroll without specialist support.
How deductions turn into a refund
Here is where the scheme comes full circle for subcontractors. CIS is taken from gross labour, before any of the subcontractor's business expenses, before their tax-free personal allowance, and before their actual tax bands are worked out. A flat 20% (or 30%) off the top is almost always more than the subcontractor's genuine tax for the year once all of that is taken into account. The result is systematic over-deduction, and so a refund.
How the over-deduction is recovered depends on the business structure, and the difference in timing is significant:
| Structure | How CIS is reclaimed | Timing |
|---|---|---|
| Sole trader subcontractor | Through the Self Assessment return, where CIS suffered is set against the tax due and any excess repaid | After the tax year ends |
| Limited company subcontractor | In real time through the Employer Payment Summary (EPS), offsetting CIS suffered against the company's PAYE and CIS liabilities | During the year, month by month |
For a sole trader, the refund flows through the annual Self Assessment return. You declare your income, claim your expenses and allowances, and the CIS already deducted is credited against the resulting bill, with any surplus repaid. A limited company does not wait that long: it reclaims in-year through the EPS, setting the CIS deducted from it against the PAYE and CIS it owes HMRC, which can mean recovering cash within weeks rather than waiting up to 18 months for a Self Assessment repayment.
Industry figures put a typical first-year CIS refund somewhere in the region of £2,000 to £3,000, but that is illustrative rather than a promise: the real figure turns entirely on your own income, your expenses and your allowances. The practical lesson is that good record-keeping, and claiming every allowable expense, directly increases what comes back. Our guide on how to claim your CIS tax refund walks through the process, the records you need and how long it takes; if you would rather have it handled for you, our CIS refund service is the way in.
One framing matters here. The refund is best understood as the start of getting your tax right, not as a one-off rebate to chase and forget. The same records that maximise this year's refund keep you compliant and efficient for the years that follow, which is why a refund is usually the entry point into an ongoing relationship rather than a transaction.
Gross Payment Status: the 0% tier
The top of the rate ladder is Gross Payment Status (GPS), which lets a subcontractor be paid in full with no CIS deducted at all, settling their tax later through Self Assessment or Corporation Tax. For a busy subcontractor this transforms cash flow: instead of 20% leaving every labour payment and waiting to be reclaimed, the full amount stays in the business.
GPS is not automatic. A subcontractor has to pass three tests, all of them: a business test (carrying out construction work in the UK through a bank account), a turnover test (net CIS turnover of £30,000 for a sole trader, with higher or per-partner and per-director thresholds for partnerships and companies, where "net" excludes VAT and materials), and a compliance test (all tax obligations met on time for the past 12 months). From 6 April 2026, holding on to GPS also got harder: under Finance Act 2026 HMRC can revoke it without advance notice where a contractor knew or should have known about fraud in its supply chain, and a fraud-based removal now triggers a five-year ban on reapplying rather than one year. We cover the qualifying tests, the application and the new April 2026 anti-fraud duties in detail in our guide to CIS gross payment status.
What changed in April 2026
April 2026 brought the most significant cluster of CIS changes in years. Pulling the threads of this guide together, the headline updates are:
- Nil returns mandatory again. Contractors must file a nil CIS300 (or notify inactivity) for any tax month with no subcontractor payments, reversing the 2015 removal.
- Tougher Gross Payment Status regime. Immediate revocation on a "knew or should have known" fraud standard, a five-year reapplication ban, and a new due-diligence duty on contractors to re-verify subcontractors, run Companies House checks and confirm bank account names.
- Public sector exemption. Payments to local authorities and public sector bodies are fully exempt from CIS under new Regulation 24ZA, so they are neither deducted on nor reported.
- Making Tax Digital for Income Tax. The first MTD threshold of £50,000 of gross income took effect, and the CIS catch is that the test uses gross income before deductions, so a subcontractor receiving £48,000 after 20% deductions on £60,000 gross is measured on the £60,000 and is in scope.
The Gross Payment Status anti-fraud measures were enacted by Finance Act 2026, which received Royal Assent on 18 March 2026, and took effect on 6 April 2026 under SI 2026/289. They are settled, in-force law.
Where Trade Tax Specialists fits
CIS is mechanically simple but practically fiddly: the labour-and-materials split, accurate verification, monthly returns that cannot be skipped, the new nil-return and due-diligence duties, and a refund that is only as good as the records behind it. Get any of it wrong and you either overpay HMRC or expose yourself to penalties.
To see what the scheme means for your own pay, try our CIS deduction calculator. Enter a typical invoice with the labour and materials split and it shows exactly what the contractor should deduct and what lands in your account.
As a construction-only practice, that is the whole of what we do. We keep subcontractors registered, compliant and claiming every expense so the refund is the full amount rather than an estimate, and we keep contractors on top of verification, monthly returns and the April 2026 obligations. You can see how that works across the year on our CIS accounting services page. If your immediate question is simply how much CIS you are owed back, start with the refund and the rest follows from there.