Getting started with CIS

Phase 1: Understanding the Construction Industry Scheme

The Construction Industry Scheme (CIS) is a tax system that applies to payments for construction work. Under CIS, contractors deduct tax from subcontractors' payments and pay it directly to HMRC. This guide will help you understand how the scheme works and what you need to do.

Allow 30 minutes to complete this learning path. By the end, you will understand whether CIS applies to you, which role you play, and the specific steps you need to take.

What is CIS and why does it exist?

CIS exists to collect tax from construction workers more efficiently. Instead of waiting until the end of the tax year for workers to pay their own tax, contractors deduct tax at source and send it to HMRC.

The scheme applies to:

• Construction operations - building work, repairs, decorating, demolition, civil engineering, and installing systems like heating, electrics, and plumbing
• Payments for labour - not materials or VAT, just the labour element of construction work
• The UK only - CIS is a UK tax scheme and applies regardless of where the contractor or subcontractor is based, if the work is done in the UK

CIS does not change how much tax you owe - it changes when and how it is collected. Deductions are advance payments of tax that count towards your final tax bill.

Work covered by CIS

CIS covers most construction work, but not everything. Understanding what counts as 'construction operations' helps you know if the scheme applies to you.

Covered by CIS:

• Building new structures (houses, offices, factories, roads, bridges)
• Alterations, repairs, and extensions to existing buildings
• Demolition and site clearance
• Decorating (internal and external)
• Installing heating, lighting, water, ventilation, air conditioning, and power systems
• Civil engineering work (drainage, sewerage, roads, railways)

Not covered by CIS:

• Architecture, surveying, and professional consultancy
• Manufacturing materials away from the construction site
• Delivering materials without installing them
• Work on oil and gas extraction

Phase 2: Are you a contractor or a subcontractor?

Under CIS, there are two roles. Many construction businesses play both roles at different times. Understanding your role determines your obligations.

What is a CIS contractor?

A contractor is any business that pays subcontractors for construction work. This includes:

• Construction businesses - main contractors, general builders, or trades businesses who hire other self-employed workers
• Deemed contractors - non-construction businesses spending over 3 million pounds per year on construction work (for example, property developers, housing associations, large retailers refurbishing stores)

Contractor obligations:

• Register with HMRC as a contractor before your first payment to subcontractors
• Verify every subcontractor with HMRC before paying them
• Deduct tax from payments (0%, 20%, or 30% depending on subcontractor's status)
• Submit monthly returns to HMRC, even if no payments were made
• Pay deductions to HMRC each month
• Give subcontractors payment and deduction statements

What is a CIS subcontractor?

A subcontractor is any self-employed person or business that carries out construction work for a contractor. This includes:

• Self-employed tradespeople (plumbers, electricians, carpenters, bricklayers)
• Limited companies providing construction services
• Partnerships carrying out construction work
• Labour-only subcontractors

Subcontractor obligations:

• Provide your UTR (Unique Taxpayer Reference), name, and National Insurance number (or company details) to contractors for verification
• Keep payment and deduction statements from contractors
• Claim back deductions through your tax return (or payroll for limited companies)
• Optionally: register with HMRC to reduce deductions from 30% to 20%

Decide your role

Answer these questions to determine your CIS role:

The sections below provide specific guidance for each role. If you are both, complete both registration processes.

Phase 3A: Contractor registration and setup

If you pay subcontractors for construction work, complete these steps.

You must register as a contractor before making your first payment. This is a legal requirement - paying subcontractors without registering can result in penalties and having to pay the tax yourself.

Verify subcontractors before payment

Before making your first payment to any subcontractor, you must verify them with HMRC. Verification tells you what deduction rate to apply (0%, 20%, or 30%).

Verification is done through the CIS online service or commercial software. You will need the subcontractor's:

• Name (exactly as registered with HMRC)
• Unique Taxpayer Reference (UTR)
• National Insurance number (sole traders) or Company Registration Number (companies)

Calculate and make deductions

After verification, calculate the CIS deduction for each payment. Deductions apply to the labour element only - exclude VAT and materials costs before applying the rate.

Phase 3B: Subcontractor registration and setup

If you carry out construction work for contractors, complete these steps.

Subcontractor registration is voluntary but strongly recommended. Without registration, contractors must deduct 30% from your payments. With registration, this drops to 20% - a significant cash flow improvement.

What to expect as a subcontractor

Once registered, here is what happens when you work for contractors:

1. Contractor verifies you: Before first payment, the contractor checks your CIS status with HMRC. Provide your name, UTR, and NI number (or company details) exactly as registered.
2. Deduction made: The contractor deducts 20% from the labour element of your payment and sends it to HMRC on your behalf.
3. Statement received: Within 14 days of each tax month end, the contractor gives you a Payment and Deduction Statement showing what they deducted.
4. Claim back at year end: When you file your tax return, the CIS deductions are offset against your tax bill. If you paid too much, you get a refund.

Phase 4: Ongoing compliance obligations

After registration, both contractors and subcontractors have ongoing obligations. Missing deadlines results in penalties, so build these into your regular business processes.

Contractor monthly obligations

Every month, CIS contractors must:

1. File a monthly return (CIS300) by the 19th of each month for the previous tax month (6th to 5th)
2. Pay deductions to HMRC by the 22nd (electronic) or 19th (postal)
3. Issue statements to subcontractors within 14 days of the tax month end

You must file returns even if you made no payments to subcontractors that month - submit a 'nil return'. Alternatively, request an inactivity period for up to 6 months if you do not expect to use subcontractors.

Subcontractor annual obligations

Subcontractors claim back CIS deductions through their annual tax return. The process depends on your business structure:

• Sole traders and partnerships: Claim through Self Assessment. Enter total CIS deductions in the self-employment section. File by 31 January after the tax year end.
• Limited companies: Claim through payroll each month using the Employer Payment Summary (EPS). Offset deductions against PAYE and employer NI. Do NOT claim through Corporation Tax - this is incorrect and can result in penalties.

Record keeping requirements

Both contractors and subcontractors must keep CIS records for at least 3 years after the end of the tax year they relate to.

Contractor records:

• Subcontractor details and verification numbers
• Gross payments and materials costs
• CIS deductions made
• Copies of statements issued
• Monthly return submissions

Subcontractor records:

• Payment and Deduction Statements received
• Invoices showing labour and materials breakdown
• Receipts for materials purchased

HMRC can fine you up to 3,000 pounds if you cannot produce records when asked.

Phase 5: Optional next steps

Once you are registered and operating CIS correctly, you may want to consider these optional enhancements.

Gross payment status (for established subcontractors)

If you have an established construction business with good tax compliance, you may qualify for Gross Payment Status (GPS). This means contractors pay you the full amount with no deductions - you then pay all your tax through your Self Assessment or Corporation Tax return.

GPS requirements:

• Minimum net construction turnover (30,000 pounds for sole traders, more for partnerships and companies)
• Clean tax compliance record for 12 months (including VAT from April 2024)
• UK bank account

GPS significantly improves cash flow but requires disciplined financial management - you must set aside money for your tax bills.

CIS software and tools

While you can use HMRC's free online service for basic CIS functions, commercial software offers advantages for busier contractors:

• Verify unlimited subcontractors (HMRC online limits you to 50)
• Automatic integration with your accounts
• Storage of verification numbers and dates
• Alerts when re-verification is needed
• Direct submission of monthly returns

Many accounting packages (Xero, QuickBooks, Sage) include CIS functionality. Your accountant may already use software that handles CIS for you.

Summary: Key CIS contacts and deadlines

Keep these references handy for your CIS obligations: