The
Construction Industry Scheme handles billions of pounds of tax deductions every year. HMRC has made no secret of the fact that errors and non-compliance within it are widespread enough to have driven the most significant reforms to the scheme since it was introduced. The overall UK tax gap currently stands at £46.8 billion, and the construction sector is one of HMRC’s stated priority areas for compliance activity.
In recent months, HMRC has been issuing targeted letters to contractors where their records suggest incorrect CIS tax deductions have been applied. Businesses have 45 days to review and correct their position before a formal compliance check begins.
The message from HMRC is clear: the scheme is under closer scrutiny than ever. From April 2026 the stakes rose materially: mandatory nil returns are back, gross payment status can now be cancelled immediately where fraud is suspected, and contractors face direct liability for lost tax where they knew or should have known their supply chain was involved in evasion.
Now is the right time to make sure your business isn’t losing money to avoidable errors.
what cis tax deductions actually are
Under the Construction Industry Scheme, contractors are required to deduct tax from payments made to subcontractors and pay those deductions directly to HMRC. CIS tax deductions aren’t a final tax bill – they’re advance payments towards a subcontractor’s income tax and National Insurance. The actual liability is settled through the annual Self Assessment return, and many subcontractors receive a refund because too much has been deducted across the year.
The deduction rate depends on the subcontractor’s registration status with HMRC:
- 0% (gross payment status): no deduction is made; the subcontractor receives the full amount and settles their own tax
- 20% (registered subcontractor): the standard rate for those verified with HMRC
- 30% (unregistered subcontractor): the higher rate applied when HMRC cannot verify the subcontractor’s registration
These deduction rates have not changed for 2026/27. What has changed is how tightly HMRC is enforcing compliance across the scheme – and that makes getting the basics right more important than ever.
Mistake 1: deducting from the full invoice rather than the labour element
This is the mistake that cost my client so much money, and it’s surprisingly common. CIS tax deductions apply only to the labour portion of a payment. Materials, VAT, plant hire and consumables are all excluded from the calculation.
If a subcontractor invoices £5,000 for labour and £2,000 for materials, the 20% CIS deduction should be applied to £5,000 only, giving a deduction of £1,000. Applying it to the full £7,000 instead means the subcontractor loses an extra £400 they shouldn’t.
The solution is straightforward: subcontractors must itemise labour and materials separately on every invoice, and contractors must only apply the deduction to the labour figure. If materials aren’t shown separately, contractors can make a reasonable estimate, but that estimate may not reflect reality. Clear invoicing protects everyone. Find out what construction expenses builders can claim.
mastake 2: paying at the wrong rate beacuse the subcontractor wasn’t verified
Before making any payment to a subcontractor, contractors must verify their registration status with HMRC to confirm the correct CIS tax deduction rate. Skipping this step is a costly shortcut.
If a contractor pays at 20% without verifying, and it later turns out the subcontractor wasn’t registered, HMRC can hold the contractor responsible for the shortfall. The 30% unregistered rate should have been applied, and the contractor may end up covering the difference. The HMRC online verification service takes minutes, and it’s a non-negotiable step for every new subcontractor engagement.
CIS and IR35 — two separate schemes that can both apply
One source of confusion we see regularly, particularly among contractors working with limited company subcontractors, is the relationship between CIS and IR35. They are separate legislation with different purposes and understanding the distinction matters.
CIS governs how tax is deducted at source from payments made to subcontractors for construction work. IR35 (the off-payroll working rules) determines whether a subcontractor who operates through their own limited company should be treated as an employee for tax purposes. The two can apply simultaneously: a limited company subcontractor could have CIS deductions taken from their payments and also be assessed as inside IR35 by the hiring contractor.
Getting employment status wrong on a monthly CIS return carries a penalty of up to £3,000. If a subcontractor should actually be treated as an employee, the correct route is PAYE rather than CIS and HMRC expects contractors to have considered this before registering anyone under the scheme. Our guide to IR35 and construction covers the key tests in plain English if you’re unsure where a working arrangement sits.
Mistake 3: missing monthly CIS returns – especially nil returns
Contractors must file a monthly CIS return with HMRC by the 19th of each month, reporting every payment made to subcontractors in the previous tax month. Miss this deadline by even a single day and HMRC issues an automatic £100 penalty. Fall two months behind and that becomes £300 in total. Six months late and the penalty rises to £300 plus 5% of the CIS deductions on the return, whichever is the higher figure. By 12 months, you are looking a substantially larger CIS penalties.
One change from April 2026 catches people out: nil returns are now mandatory again. If you made no subcontractor payments in a given month, you must either file a nil return or notify HMRC of inactivity. The option to simply do nothing no longer exists. Contractors who were used to ignoring quiet months will now face penalties if they don’t act.
Mistake 4: assuming gross payment status is permanent
Gross payment status is a genuine advantage – receive your full payment, settle tax yourself at year end, protect your cash flow. But treating it as something you earn once and keep indefinitely is a costly assumption.
HMRC reviews gross payment status regularly, and from April 2026 the rules around revocation have been significantly tightened. Where HMRC has reasonable grounds to suspect a connection to fraudulent tax evasion, gross payment status can be cancelled immediately with no advance warning. Businesses that lose it on fraud grounds cannot reapply for five years. Even in non-fraud cases, late returns, unpaid tax, or a compliance failure of any kind can trigger a review and revocation.
If you hold gross payment status, protect it. Every return filed on time, every payment made promptly, is an investment in keeping that cash flow advantage.
Mistake 5: treating CIS tax deductions as your final tax bill
Perhaps the most expensive misconception of all. CIS tax deductions are advance payments, not a settled tax position. Subcontractors still need to complete a Self-Assessment return each year (or, from April 2026 for those with income over £50,000, quarterly MTD submissions), declaring their full gross income and claiming deductions for allowable expenses.
For many subcontractors, CIS deductions exceed the actual tax owed, meaning a refund is due. But that refund won’t arrive unless the return is filed. On the other hand, if your tax bill is higher than the deductions taken – because your income was higher than expected or you have other income sources – you’ll owe the difference. Assuming CIS has sorted everything is a gamble that regularly results in penalties, interest, and unpleasant surprises.
Getting your CIS right in 2026/27
The Construction Industry Scheme rewards those who understand it and stay on top of the detail. If you’re a subcontractor, registering with CIS to move from 30% to 20% deductions is the single most impactful step you can take for your cash flow. If you hold gross payment status, treat every compliance obligation as essential maintenance. If you’re a contractor, verify every subcontractor, apply deductions to labour only, and file every monthly return on time.
At Adams Accountancy, we work with construction businesses across Kent to keep their CIS compliance clean and their tax bills as low as legitimately possible. For guidance on CIS registration, monthly returns, or reclaiming overpaid deductions, take a look at our CIS guide for builders and our guides for CIS contractors and CIS subcontractors. Or simply give us a call on 01322 250001 for a free, no-obligation chat about your construction business finances.
About the author
Michelle Adams is a qualified accountant and director at Adams Accountancy, an all-female practice based in Dartford, Kent. With over 15 years’ experience supporting contractors, subcontractors and small construction businesses across Kent and beyond, Michelle and her team specialise in making
CIS compliance straightforward and stress-free. Call us on 01322 250001 or contact us online for a free consultation.
Frequently asked questions about CIS tax deductions and rates in 2026/27
What are the CIS tax deduction rates for 2026/27?
The CIS tax deduction rates are unchanged for 2026/27: 0% for subcontractors with gross payment status, 20% for registered subcontractors, and 30% for those not registered with HMRC. These deductions are advance payments towards income tax and National Insurance, not a final tax bill, and apply to the labour element of payments only and not materials, VAT or plant hire.
How do I reclaim CIS tax deductions I’ve overpaid?
CIS tax deductions are offset against your total tax liability when you file your Self-Assessment return, and if more has been deducted than you owe, HMRC will refund the difference. The refund won’t happen automatically. You need to file your return and declare your full gross income, not the net amount you received after deductions, so keeping all your payment and deduction statements from contractors is essential.
What changed about CIS in April 2026?
Nil returns are now mandatory for contractors who made no subcontractor payments in a given month, and HMRC gained new powers to cancel gross payment status immediately without notice where fraud is suspected, with a five-year bar on reapplying. The CIS tax deduction rates themselves remain unchanged at 0%, 20% and 30%.
When does CIS apply to a business that isn’t a builder?
CIS applies to any business that spends more than £3 million on construction in a 12-month period, regardless of its main activity. These are known as deemed contractors and include property developers and large retailers who commission significant building work. If your business is approaching that threshold, it’s worth taking advice before making payments to subcontractors, as late registration carries penalties.