Why construction tax is different

Construction businesses face a unique set of overlapping tax obligations. Unlike most industries, when you pay for labour and services in construction, you may need to deal with four different tax systems simultaneously:

CIS - Construction Industry Scheme (tax deductions from subcontractor payments)
VAT reverse charge - Special VAT rules for construction services
CITB levy - Statutory training levy for construction employers
PAYE - Income tax and National Insurance for employees

Getting any one wrong creates compliance risk. Getting them confused with each other - which is common - can be costly. This learning path shows how they work together.

Phase 1: Understand the four tax systems

Before diving into detail, understand what each system does and when it applies. This orientation helps you see the complete picture before focusing on specifics.

CIS deduction rates at a glance

CIS requires contractors to deduct tax from payments to subcontractors. The rate depends on the subcontractor's registration status with HMRC.

Registered subcontractor rate: 20%
Unregistered subcontractor rate: 30%
Gross payment status rate: 0% (no deductions)
Effective from: Current tax year 2026/27
Deduction basis: Labour element only (excluding VAT and materials)

When to apply each rate:

20% rate - Subcontractor is registered with HMRC for CIS but does not have gross payment status. This is the standard rate for most registered subcontractors.
30% rate - Subcontractor is not registered with HMRC, or their details cannot be verified. Always verify subcontractors before first payment.
0% rate (gross payment) - Subcontractor has been granted gross payment status by HMRC. They receive full payment and account for tax themselves via Self Assessment or Corporation Tax.

Important: Deductions are calculated on the labour element only. Exclude VAT and any materials the subcontractor has directly paid for.

What is the Construction Industry Scheme (opens in a new tab)

CIS contractor - make deductions and pay subcontractors (opens in a new tab)

The four systems compared

System	Purpose	Who pays	To whom
CIS	Tax collection at source from subcontractors	Contractor deducts	HMRC monthly
VAT reverse charge	VAT on construction services	Customer accounts for VAT	HMRC via VAT return
CITB levy	Construction training funding	Employer pays levy	CITB annually
PAYE	Income tax and NI for employees	Employer deducts and pays employer NI	HMRC monthly

Key insight: They overlap but are not identical

A single payment to a subcontractor may involve CIS, VAT reverse charge, AND contribute to your CITB levy - all at the same time. However:

CIS applies to labour only - materials are excluded
VAT reverse charge applies to the whole supply if construction services
CITB levy uses your payments to net-paid CIS subcontractors (gross of the CIS deduction, excluding materials) in calculations
PAYE is for employees only - CIS is for subcontractors

Phase 2: Determine which obligations apply to you

Not all construction businesses face all four obligations. Your specific situation depends on whether you engage subcontractors, whether you and your suppliers are VAT-registered, and your overall wage bill.

Quick assessment: Your obligations

CIS applies if you:

Pay subcontractors for construction work, OR
Are a "mainstream contractor" (construction is your main business), OR
Spend more than 3 million per year on construction (deemed contractor)

VAT reverse charge applies if:

Both you AND your supplier are VAT-registered, AND
Both are CIS-registered (or required to be), AND
The supply is of construction services, AND
You are NOT an end user

CITB levy applies if you:

Carry out construction activities, AND
Have combined PAYE wages + net CIS payments over 150,000 per year

PAYE applies if you:

Have employees (workers who are NOT genuinely self-employed)

Construction tax compliance overview

Comprehensive guide showing how all four tax systems interact on the same payment. Includes worked examples and checklists for integrated compliance.

Critical clarification: CIS and employment status

This is one of the most misunderstood areas in construction. Getting it wrong exposes you to significant liability.

Why CIS registration is not the same as being self-employed

CIS is a tax collection mechanism. Employment status is a legal relationship. They are completely separate. A worker can be CIS-registered AND still be an employee - which means you should have been operating PAYE.

Critical compliance point: Being registered under the Construction Industry Scheme (CIS) does NOT determine whether someone is employed or self-employed. CIS is purely a tax collection mechanism - it does not change the underlying employment relationship.

A worker can be:

CIS-registered AND genuinely self-employed - correct treatment
CIS-registered AND actually an employee - compliance breach
Not CIS-registered AND an employee - correct treatment (use PAYE)

CIS purpose: Tax collection mechanism for construction payments
CIS determines: Deduction rate (0%, 20%, 30%) based on registration status
CIS does NOT determine: Employment status (employee vs self-employed)
Employment status determines: NI liability, employment rights, PAYE obligations, IR35
Determining authority: Employment status tests in case law and HMRC guidance

The employment status tests

Employment status is determined by multiple factors, regardless of CIS registration:

Control: Does the engager control how, when, and where work is done?
Substitution: Can the worker send a substitute to do the work?
Mutuality of obligation: Is there ongoing obligation to offer/accept work?
Financial risk: Does the worker bear genuine business risk?
Equipment: Does the worker provide significant equipment/materials?
Integration: Is the worker integrated into the organisation?
Exclusivity: Is the worker restricted from working for others?

Warning signs of disguised employment

A CIS-registered worker may actually be an employee if:

Works exclusively or mainly for one contractor
Has set working hours dictated by contractor
Cannot send a substitute without contractor approval
Uses contractor's tools and equipment
Is supervised like other employees
Receives regular weekly/monthly payments regardless of work done
Has no genuine risk of loss on contracts

If worker is actually an employee: PAYE and NI must be operated - CIS is wrong treatment
Employer NI rate: 15% (from 6 April 2025, plus Apprenticeship Levy if applicable)
Employee NI rate: 8% on earnings above threshold
Holiday pay entitlement: 5.6 weeks per year minimum
Wrongful CIS deduction: HMRC can recover unpaid NI from contractor

Risks of misclassification

For the contractor:

NI liability: HMRC can recover unpaid employer and employee NI
Interest and penalties: On underpaid tax and NI
Employment tribunal claims: Worker can claim employee rights retrospectively
Holiday pay claims: Potentially years of unpaid holiday accrued
Unfair dismissal: 2-year qualifying employees gain unfair dismissal rights
Pension auto-enrolment: Should have been enrolled in workplace pension

For the worker:

Loss of employment rights: If status challenged by contractor
No statutory sick pay: Self-employed have no SSP entitlement
No redundancy: No statutory redundancy payment if work ends

Using HMRC's Check Employment Status for Tax (CEST) tool

HMRC provides the CEST tool to help determine employment status. While not legally binding, HMRC will stand by CEST results if:

The information entered is accurate and complete
It reflects the actual working arrangement
The arrangement does not change after assessment

Check employment status for tax (CEST) (opens in a new tab)

Understanding off-payroll working (IR35) (opens in a new tab)

Best practice for contractors

Assess each engagement: Do not assume CIS registration means self-employment
Use CEST tool: Document status determination for each worker
Review contracts: Ensure contracts reflect actual working practices
Monitor arrangements: Status can change if working practices change
Keep records: Retain CEST results and status assessments
Take professional advice: For borderline cases, seek specialist advice

IR35 and CIS

The off-payroll working rules (IR35) apply when a worker provides services through an intermediary (usually their own limited company). If IR35 applies:

The end client (or agency) must assess status
If "inside IR35" - deemed employment, PAYE must be operated
CIS may still apply to the labour element of payments to the company
Both IR35 and CIS can apply simultaneously in construction

CIS registration does not determine employment status

Full guide on why CIS and employment status are separate, the tests that determine status, and the risks of misclassification for both contractors and workers.

Phase 3: How CIS and VAT reverse charge work together

When paying a VAT-registered subcontractor for construction services, both CIS deductions AND the VAT reverse charge may apply to the same payment. Understanding how these interact is essential for correct accounting.

Worked example: CIS and VAT on the same payment

This example shows a typical subcontractor payment where both CIS deductions and VAT reverse charge apply. Follow through to see how each element is calculated and recorded.

When a CIS-registered contractor pays a VAT-registered subcontractor for construction services, both CIS deductions AND the VAT reverse charge may apply. Understanding how these interact is essential for correct accounting.

Key principle: CIS deductions apply to the labour element of the payment. The VAT reverse charge means no VAT is added to the invoice - the contractor accounts for VAT separately on their VAT return.

Scenario: Subcontractor invoice for construction work with materials
Labour charge: £10,000
Materials provided by subcontractor: £2,000
VAT reverse charge applies: Yes - both parties VAT and CIS registered
Subcontractor CIS status: Registered (20% deduction rate)

Step 1: Understanding the invoice

The subcontractor's invoice shows:

Labour: £10,000
Materials: £2,000
VAT: £0 (reverse charge applies - marked on invoice)
Invoice total: £12,000

The invoice must state: "Reverse charge: Customer to account for VAT to HMRC"

Step 2: Calculate CIS deduction

CIS deductions apply to labour only, not materials:

Labour element: £10,000
CIS rate: 20% (registered subcontractor)
CIS deduction: £10,000 x 20% = £2,000

Step 3: Calculate payment to subcontractor

Labour: £10,000
Less CIS deduction (20% of labour): -£2,000
Net labour payment: £8,000
Add materials (no CIS deducted): +£2,000
Total payment to subcontractor: £10,000

Step 4: Contractor's accounting entries

The contractor must:

Pay subcontractor: £10,000
Pay HMRC (CIS): £2,000 (by 22nd of following month)
VAT return Box 1: £2,400 (reverse charge VAT: £12,000 x 20%)
VAT return Box 4: £2,400 (input VAT recovery, if fully taxable)

Net VAT effect: Zero for fully taxable contractor (Box 1 = Box 4)

Step 5: Subcontractor's accounting entries

The subcontractor:

Receives: £10,000
Records CIS suffered: £2,000 (offset against tax liability)
VAT return Box 6: £12,000 (value of supplies)
No VAT in Box 1: Reverse charge means no output VAT collected

Contractor total outlay: £12,000 (subcontractor + HMRC)
Subcontractor receives: £10,000 (plus £2,000 tax credit)
HMRC receives (CIS): £2,000
HMRC receives (VAT): £0 net (reverse charge offset)

Common mistakes to avoid

Double taxation: Do NOT apply CIS to materials - only labour is subject to deductions
Charging VAT: If reverse charge applies, the subcontractor must NOT charge VAT
Missing annotation: Invoice must clearly state reverse charge applies
VAT timing: Contractor accounts for reverse charge VAT in the period invoice received
Partially exempt contractor: May not recover all input VAT - creates real cost

VAT domestic reverse charge for building and construction services (opens in a new tab)

Make deductions and pay subcontractors (CIS) (opens in a new tab)

VAT reverse charge for construction

Detailed guide on when and how to apply the VAT domestic reverse charge. Covers end user rules, invoice requirements, and accounting treatment.

Key points from the CIS + VAT interaction

CIS applies to labour only - materials are paid in full, not subject to deduction
VAT reverse charge means no VAT on invoice - the customer accounts for VAT themselves
CIS is calculated on net (pre-VAT) amount - the reverse charge does not affect CIS calculations
Net VAT effect is usually zero - for fully taxable contractors, Box 1 equals Box 4
Contractor pays subcontractor net of CIS - plus full CIS deduction to HMRC

Phase 4: How CIS relates to CITB levy

Your CIS payment data directly feeds into your CITB levy calculation. Understanding this connection helps you budget correctly and explains why the mix of employees versus subcontractors affects your levy.

CITB levy calculation from CIS data

The CITB levy applies different rates to PAYE wages (0.35%) and payments to net-paid CIS subcontractors (1.25%, calculated on the payment before the CIS deduction and excluding materials). This means using more subcontractors increases your CITB costs.

The CITB levy is a statutory training levy collected from construction employers under the Industrial Training Act 1982. For businesses that engage CIS subcontractors, the levy applies at a higher rate to net CIS payments than to PAYE wages.

Key connection: Your CIS return data feeds directly into your CITB levy calculation. CITB uses your annual CIS payments to calculate part of your levy assessment.

CITB levy on PAYE employees: 0.35% of gross PAYE earnings
CITB levy on CIS subcontractors: 1.25% of payments to net-paid CIS subcontractors (the payment gross of the CIS deduction, excluding the cost of materials)
Levy period: CITB 2026 Levy Order periods, with assessments based on the 2024/25 to 2026/27 base periods
Exemption threshold: Under £150,000 combined PAYE + net CIS = exempt
Small employer band: £150,000 to £499,999 = 50% reduction

Why CIS payments attract higher levy rate

The 1.25% rate on CIS payments (versus 0.35% on PAYE) reflects:

Subcontractors may not receive employer-funded training
Higher rate compensates for lack of direct training investment
Encourages contractors to invest in training or use trained subcontractors

Worked example: Mixed PAYE and CIS workforce

A construction contractor with:

Annual PAYE wages: £200,000 gross
Annual payments to net-paid CIS subcontractors (gross of CIS deductions, excluding materials): £300,000
Combined total: £500,000 (above the small employer band)

CITB levy calculation

PAYE element: £200,000 x 0.35% = £700
CIS element: £300,000 x 1.25% = £3,750
Total levy: £4,450
Any reduction: No - the 50% reduction band ends at £499,999, and the combined total is £500,000
Final levy payable: £4,450

How CIS data flows to CITB

CIS monthly returns: You report payments to subcontractors to HMRC
Tax year end: HMRC shares aggregate CIS data with CITB (with employer consent)
CITB levy return: You confirm PAYE and CIS figures annually
Levy assessment: CITB issues assessment in spring following tax year

Who must register with CITB

You must register with CITB if you carry out construction activities as defined in the Levy Order, including:

Site preparation, demolition, earth moving
Building construction, alteration, repair
Civil engineering works
Installation (electrical, plumbing, heating)
Building completion (plastering, joinery, painting)
Plant hire with operator for construction

Important distinctions

CIS registration (HMRC): Determines tax deduction rates - separate from CITB
CITB registration: Required for all construction employers - not optional
Levy exemption: Based on wage bill threshold, not CIS registration status
Grant eligibility: Even exempt employers can claim CITB training grants

CITB levy, grants and funding (opens in a new tab)

Construction Industry Scheme (CIS) (opens in a new tab)

Why subcontractor payments cost more in CITB levy

Net CIS payments attract a levy rate of 1.25% compared to 0.35% for PAYE wages. This is because:

Subcontractors may not receive employer-funded training
The higher rate compensates CITB for this training gap
It incentivises contractors to invest in training or use trained subcontractors

Practical implication: When comparing the cost of using employees versus subcontractors, factor in the higher CITB levy rate on subcontractor payments (1.25% vs 0.35%).

Phase 5: Verify your integrated compliance

Use this checklist to verify you are meeting all four construction tax obligations correctly.

Before engaging a new subcontractor

Verify their CIS registration status with HMRC online service
Assess employment status using CEST tool and document the result
Check their VAT registration status
Determine if VAT reverse charge applies (both CIS registered, not end user)
If they claim end user status, get written confirmation

For each subcontractor payment

Separate labour from materials on the invoice
Apply correct CIS deduction rate to labour only (0%, 20%, or 30%)
Check invoice shows reverse charge annotation if applicable
Issue payment and deduction statement to subcontractor

Monthly deadlines

By 19th: Submit CIS return to HMRC showing all payments and deductions
By 22nd: Pay CIS deductions to HMRC (electronic payment)
Quarterly/monthly: Include reverse charge VAT in your VAT return

Annual actions

Review employment status of regular subcontractors (status can change over time)
Complete CITB levy return accurately (figures must match CIS returns)
Pay CITB levy as assessed

Summary: Your construction tax obligations

You have now learned:

The four systems - CIS, VAT reverse charge, CITB, and PAYE all apply to construction businesses, often simultaneously
CIS is not employment status - being CIS-registered does not make someone self-employed; always assess status separately
CIS and VAT interact - both can apply to the same payment; CIS on labour, reverse charge on the whole supply
CITB uses CIS data - your CIS payment figures feed directly into your levy calculation at 1.25%
Integrated compliance - check each obligation separately for each engagement

Next steps

Depending on your specific needs, explore:

Understanding construction tax obligations

Why construction tax is different

Phase 1: Understand the four tax systems

The four systems compared

Key insight: They overlap but are not identical

Phase 2: Determine which obligations apply to you

Quick assessment: Your obligations

CIS applies if you:

VAT reverse charge applies if:

CITB levy applies if you:

PAYE applies if you:

Construction tax compliance overview

Critical clarification: CIS and employment status

CIS registration does not determine employment status

Phase 3: How CIS and VAT reverse charge work together

VAT reverse charge for construction

Key points from the CIS + VAT interaction

Phase 4: How CIS relates to CITB levy

Why subcontractor payments cost more in CITB levy

Phase 5: Verify your integrated compliance

Before engaging a new subcontractor

For each subcontractor payment

Monthly deadlines

Annual actions

Summary: Your construction tax obligations

Next steps

Register as a CIS contractor

Submit your CIS monthly return

Verify a subcontractor's CIS status

Understanding construction tax obligations

Why construction tax is different

Phase 1: Understand the four tax systems

The four systems compared

Key insight: They overlap but are not identical

Phase 2: Determine which obligations apply to you

Quick assessment: Your obligations

CIS applies if you:

VAT reverse charge applies if:

CITB levy applies if you:

PAYE applies if you:

Construction tax compliance overview

Critical clarification: CIS and employment status

CIS registration does not determine employment status

Phase 3: How CIS and VAT reverse charge work together

VAT reverse charge for construction

Key points from the CIS + VAT interaction

Phase 4: How CIS relates to CITB levy

Why subcontractor payments cost more in CITB levy

Phase 5: Verify your integrated compliance

Before engaging a new subcontractor

For each subcontractor payment

Monthly deadlines

Annual actions

Summary: Your construction tax obligations

Next steps

Register as a CIS contractor

Submit your CIS monthly return

Verify a subcontractor's CIS status

Related journeys

Getting started with CIS

Complete your CIS monthly compliance

Fix CIS payment errors

CIS compliance quick check