Why the compliance burden falls on the contractor
Under the Construction Industry Scheme, the contractor is the withholding agent. Rather than collecting tax from a large, dispersed population of subcontractors, HMRC requires the contractor to deduct money from each payment and pass it over monthly. The subcontractor receives their payment net of any deduction and reclaims any overpayment after the tax year ends. Every compliance obligation in CIS flows to the contractor: the deadlines, the reporting and the penalties for anything missed. Every step in this checklist follows from that structure.
Step 1: Verify before the first payment
Before paying any subcontractor for the first time, you must verify their CIS status with HMRC. Verification tells you which deduction rate to apply: 0% if the subcontractor holds gross payment status, 20% if they are registered, or 30% if they are not registered at all. Applying the wrong rate, in either direction, is a compliance failure. Paying a 30% subcontractor at 20% means you are under-deducting and HMRC can come to you for the shortfall.
Verification can be done online through HMRC's CIS online service, by telephone on 0300 200 3210 (Monday to Friday, 8am to 6pm) or through your tax agent. HMRC confirms the rate and gives you a verification number. Keep that number in your CIS records. It is your evidence that you applied the correct rate if HMRC asks later. From 6 April 2026 (under Finance Act 2026) re-verifying each subcontractor before payment also forms part of the due-diligence trail that protects against GPS fraud-revocation exposure. Full details are in our guide to verifying subcontractors under CIS.
You do not need to re-verify a subcontractor you have already paid in the current tax year, unless something changes. For a new engagement, always verify first.
Step 2: Calculate the correct deduction on each payment
Once you know the rate, you calculate the deduction. The critical rule here is one that trips up contractors regularly: CIS deductions apply to the labour element only. The cost of materials the subcontractor has purchased for the job is excluded from the deduction base entirely.
So if a subcontractor submits an invoice for £2,000 made up of £1,400 labour and £600 materials:
- The deduction base is £1,400 (the labour element).
- At 20% (registered subcontractor), the deduction is £280.
- You pay the subcontractor £1,720 (£2,000 minus £280).
- You pass £280 to HMRC.
Applying the 20% to the full £2,000 would produce a deduction of £400. That would be £120 too much, creating an over-deduction and a problem for the subcontractor's cash flow. The labour-only rule is not an option. It is how the scheme works.
Step 3: Issue a payment and deduction statement within 14 days
Within 14 days of making each payment to a subcontractor, you must issue them a payment and deduction statement (PDS). The PDS must show the gross amount of the payment, the amount treated as the deduction base (the labour element), the deduction rate applied and the amount deducted. For a subcontractor paid at 0% (gross payment status) you still issue a PDS showing a nil deduction.
Subcontractors need the PDS to complete their Self Assessment or Corporation Tax return and to reclaim any CIS overpayment. Issuing it late creates a knock-on compliance problem for them as well as a breach of your own obligations. A full walkthrough of what the PDS must contain is in our guide to CIS payment and deduction statements.
Step 4: File the CIS300 monthly return by the 19th
Every month you must file a CIS300 return with HMRC reporting all payments made to subcontractors in the preceding tax month. Tax months run to the 5th, so the return for the period ending 5 May is due by 19 May, the return for the period ending 5 June is due by 19 June, and so on.
From 6 April 2026, nil returns are mandatory. The nil-return obligation was removed in 2015 but was reinstated from 6 April 2026. If you made no payments to subcontractors in a tax month you must either file a nil CIS300 or pre-notify HMRC of inactivity for that period. This catches contractors out because the 2015 removal has been the rule for over a decade. You can read the detail in our guide to the CIS monthly return.
The penalty for a late CIS300 escalates with time:
| How late | Penalty |
|---|---|
| 1 day late | £100 |
| 2 months late | £200 |
| 6 months late | £300 or 5% of the CIS deductions on the return (whichever is higher) |
| 12 months late | £300 or 5% of the CIS deductions on the return (whichever is higher) |
| 12 months late, information withheld deliberately | An additional penalty of up to £3,000 or 100% of the CIS deductions (whichever is higher), on top of the above |
This ladder applies to nil returns as well as substantive ones. There is no safe exemption for a quiet month.
Step 5: Pay HMRC by the 22nd
The deductions you have calculated across all subcontractor payments in the tax month must reach HMRC by the 22nd of the following tax month if you pay electronically. If you pay by cheque the deadline is the 19th, the same day as the filing deadline. For most contractors paying electronically, the practical window is the 19th to file and the 22nd to pay, with both sitting in the same week each month.
Late payment of CIS deductions is treated as late payment of PAYE and attracts the standard PAYE late-payment penalty. The two deadlines, filing and payment, are separate obligations. Filing on time but paying late still results in a penalty.
Step 6: Keep your CIS records
HMRC requires you to keep CIS records for a minimum of three years. Given that HMRC can investigate up to six years back in cases of suspected under-payment, six years is the safer working standard. Records to retain include verification numbers, copies of every PDS issued, details of each payment (gross amount, deduction base, rate, deduction), copies of CIS300 returns filed and evidence of payment to HMRC. Payroll or CIS software will capture most of this automatically.
Your monthly CIS compliance calendar
| Step | Action | Deadline | Consequence of failure |
|---|---|---|---|
| 1 | Verify new subcontractors with HMRC, obtain deduction rate and verification number | Before first payment | Wrong rate applied; possible under-deduction liability for contractor |
| 2 | Calculate deduction on the labour element of each payment (0% / 20% / 30%) | At time of each payment | Over- or under-deduction; HMRC can recover shortfall from contractor |
| 3 | Issue payment and deduction statement to each subcontractor | Within 14 days of each payment | Breach of CIS regulations; subcontractor unable to claim their refund accurately |
| 4 | File CIS300 monthly return (or nil return from April 2026) | 19th of following tax month | Penalty from £100; escalates to £300 or 5% of deductions at 12 months, plus up to £3,000 or 100% if information is withheld deliberately |
| 5 | Pay CIS deductions to HMRC electronically | 22nd of following tax month | PAYE late-payment penalty |
| 6 | Retain CIS records (verification numbers, PDS copies, returns, payment evidence) | Minimum 3 years; 6 years recommended | No defence in an HMRC investigation; penalties for failure to produce records |
Worked example: three subcontractors in April 2026
A contractor pays three subcontractors during the tax month ending 5 May 2026. Here is how the checklist applies to each.
Subcontractor A (registered, 20% rate)
Invoice: £3,000 total, made up of £2,000 labour and £1,000 materials.
Verification: confirmed registered, 20% rate, verification number recorded.
Deduction: 20% of £2,000 labour = £400.
Payment to subcontractor: £2,600.
PDS issued within 14 days showing £2,000 labour base, 20% rate, £400 deducted.
Subcontractor B (gross payment status, 0% rate)
Invoice: £5,000 total, all labour.
Verification: confirmed GPS holder, 0% rate, verification number recorded.
Deduction: £0.
Payment to subcontractor: £5,000 in full.
PDS issued within 14 days showing £5,000 labour base, 0% rate, nil deduction.
Subcontractor C (unregistered, 30% rate)
Invoice: £1,500 total, made up of £900 labour and £600 materials.
Verification: not found on CIS register, 30% rate applies, verification number recorded.
Deduction: 30% of £900 labour = £270.
Payment to subcontractor: £1,230.
PDS issued within 14 days showing £900 labour base, 30% rate, £270 deducted.
CIS300 for the period ending 5 May 2026
Total deductions to report: £400 + £0 + £270 = £670.
CIS300 filed by 19 May 2026.
£670 paid electronically to HMRC by 22 May 2026.
Each subcontractor's PDS gives them the figures they need for their own tax return. Subcontractor C, deducted at 30%, has the strongest incentive to register for CIS promptly, because registration would have cut their deduction from £270 to £180 on this single payment alone.
Deemed contractors: when CIS applies even if you are not in construction
A non-construction business that spends £3 million or more a year on construction work is classified as a deemed contractor under CIS and must meet all the same obligations: register, verify every subcontractor, deduct at the correct rate, issue payment and deduction statements and file monthly CIS300 returns. The most common examples are property developers, large retailers undertaking recurring fit-out programmes and public bodies with substantial construction spend.
The £3m threshold applies to annual construction spend, not to overall turnover. Once crossed, the full regime applies immediately, with no phase-in. Missing deemed-contractor status is a structural compliance failure: HMRC can recover unpaid deductions from the deemed contractor directly, not from the subcontractors who were paid gross.
Where to go next
To check the deduction arithmetic on any invoice before payment, use our CIS deduction calculator: enter the invoice total, the labour and materials split and the deduction rate, and it returns the deduction and net payment figures instantly.
For the verification step in more detail, see our guide to CIS subcontractor verification. For the full picture on filing, corrections and amended returns, see our CIS monthly return guide. If you want someone to handle the full cycle each month, our team works with contractors across construction every week. See the full range on our services page.