Construction Industry Scheme (CIS) guide for builders

If you’ve just received your first payment from a main building contractor and noticed 20% of your earnings have vanished, you’re probably wondering what’s happened to your money. Welcome to the Construction Industry Scheme – probably the most confusing tax system builders deal with, but once you understand it, managing CIS becomes pretty straightforward.

What is the Construction Industry Scheme?

The Construction Industry Scheme is HMRC’s way of collecting tax from people working in construction. Instead of waiting until the end of the tax year for your Self-Assessment payment, tax is deducted at source throughout the year when contractors pay you.

Think of it like PAYE for construction workers, except you’re still self-employed. Main contractors and building firms deduct tax from your payments before they pay you, then pass that money directly to HMRC on your behalf.

The scheme applies to most construction work in the UK, including:

• Site preparation and demolition
• Building, decorating, and refurbishing
• Installation of systems (heating, lighting, plumbing, air conditioning)
• Site restoration and landscaping
• Scaffolding and access equipment

Who needs to register for CIS?

You need to register if you’re either a subcontractor being paid by other construction businesses, or a contractor paying subcontractors.

Register as a subcontractor if:

• You’re a sole trader, partnership, or limited company working for other construction businesses
• You work in construction and receive payments from contractors
• You want to avoid the higher 30% deduction rate

Register as a contractor if:

• You pay subcontractors to do construction work for you
• Your construction spend averages over £3,000 per month over a rolling 12-month period
• You’re a mainstream contractor regularly using subcontractors

A plasterer working directly for homeowners doesn’t need CIS registration. But the same plasterer doing work for a building company absolutely does.

CIS deduction rates: 20% or 30%?

There are two main CIS deduction rates, and the difference between them significantly affects your cash flow.

Standard rate: 20%

Most registered subcontractors pay 20%. If you earn £1,000 on a job, the contractor deducts £200 and pays you £800. That £200 goes directly to HMRC as advance payment towards your tax bill.

Higher rate: 30%

Unregistered subcontractors face 30% deductions. On that same £1,000 job, you’d only receive £700. That extra 10% deduction (£100) is a substantial cash flow hit, especially over multiple jobs.

Gross payment status: 0%

Some established businesses qualify for gross payment status, meaning no deductions are taken. You receive 100% of your payment and handle your own tax payments. However, qualifying is tough – you need to prove compliance history, turnover thresholds, and pass HMRC’s tests.

The message is clear: register for CIS as soon as you start working for contractors. That 10% difference between registered and unregistered rates adds up quickly.

How CIS works in practice

Here’s what happens with a typical CIS payment:
1. You complete work for a contractor worth £2,500
2. The contractor verifies your CIS status with HMRC
3. They deduct 20% (£500) for tax
4. You receive £2,000
5. The contractor reports this to HMRC and pays your £500 deduction
6. You receive a CIS statement showing the gross payment, deduction, and net payment
Keep every CIS statement you receive. These prove how much tax you’ve already paid when you complete your Self-Assessment tax return.

Your responsibilities as a CIS subcontractor

Being registered for CIS doesn’t remove your other tax obligations. You still need to:

Complete annual Self-Assessment returns – File your tax return by 31st January each year showing all your income and expenses. Your CIS deductions are credited against your total tax bill.

Keep proper records – Maintain records of all income, expenses, and CIS statements for at least six years.

Pay any additional tax owed – CIS deductions might not cover your full tax bill, especially if you have other income or your profits are higher than expected. You’ll need to pay the difference.

Register for VAT if required – If your turnover exceeds £90,000, you need separate VAT registration. CIS and VAT are different systems.

One of our clients in Sevenoaks recently discovered he owed an additional £3,200 at year-end despite having CIS deducted all year. His profits were higher than the CIS covered, and he hadn’t set aside money for the balance. Don’t let this catch you out.

If you’re a contractor: your CIS obligations

Contractors have different responsibilities under the scheme. You must:

Verify every subcontractor – Before making any payment, verify their CIS status with HMRC. This tells you what deduction rate to apply (0%, 20%, or 30%).

Make the correct deductions – Deduct the right percentage based on their status. Getting this wrong can lead to penalties.

Pay HMRC monthly – Send CIS deductions to HMRC by the 22nd of each month (19th if paying by cheque).

Submit monthly returns – File a CIS300 return to HMRC every month, even if you haven’t made any payments that month.

Provide CIS statements – Give subcontractors payment statements showing gross payment, deductions, and net payment.

Many small contractors in Kent tell us the monthly CIS returns feel like extra admin burden, but HMRC takes CIS compliance seriously. Late returns or payments result in automatic penalties.

Materials and CIS: the crucial exception

Here’s something that catches many builders out: CIS deductions only apply to labour and related costs. The cost of materials is exempt from CIS deductions.

If a subcontractor supplies materials as part of their work, you can pay for those materials without deducting CIS. However, you need clear evidence:

• Separate invoicing showing materials costs distinctly
• Receipts proving the subcontractor purchased the materials
• Reasonable material costs for the work involved

HMRC watches material claims carefully because some people try to inflate material costs to reduce CIS deductions. Keep everything documented and reasonable.

Common CIS mistakes to avoid

After working with construction businesses across Kent for years, we see the same mistakes repeatedly:

Failing to register early enough – Don’t wait until your first payment to register. It takes time, and you’ll face 30% deductions until your registration is processed.

Not keeping CIS statements – These are your proof of tax paid. Without them, you might pay tax twice on the same income.

Mixing up CIS and VAT – They’re separate systems with different rules. Don’t confuse CIS tax deductions with VAT on invoices.

Forgetting about payments on account – CIS deductions reduce your tax bill, but if you owe more than £1,000 at year-end, you’ll face payments on account the following year.

Treating CIS deductions as final tax – CIS is advance payment, not your final tax bill. You still complete a tax return and may owe more.

Getting CIS right from the start

The Construction Industry Scheme might seem complicated initially, but it becomes routine once you understand the basics. Register early, keep proper records, and remember that CIS deductions are advance payments towards your tax bill, not the final amount.

Many builders we work with across Dartford and Kent initially struggled with CIS but now manage it confidently with the right systems in place. Using cloud accounting software to track CIS deductions alongside your other income and expenses makes year-end much simpler.

Get support with CIS

Need help with CIS registration, monthly returns, or understanding how much tax you’ll actually owe after CIS deductions? Contact Adams Accountancy for a free consultation. We specialise in construction businesses and can help you navigate CIS whilst maximising your legitimate expense claims.

Check out our recommendations and see what our construction clients say about working with us.

About the author

Michelle Adams is a qualified accountant and director at Adams Accountancy, with over 15 years of experience helping construction businesses navigate CIS compliance and tax planning. Her team specialises in working with builders, subcontractors, and construction firms across Kent, making complex tax requirements manageable for busy tradespeople.

Frequently asked questions about CIS

Do I need to register for CIS if I only work for homeowners?

No. If you only work directly for homeowners and domestic clients, you don’t need CIS registration. CIS only applies when you work for other construction businesses, contractors, or property developers. However, register immediately when you start working for any construction businesses to avoid the 30% deduction rate.

Can I get my CIS deductions refunded if I’ve overpaid tax?

Yes. When you complete your Self-Assessment tax return, HMRC calculates your actual tax liability. If your CIS deductions exceed what you owe, HMRC refunds the difference. Many subcontractors receive tax refunds because CIS deductions (especially at 20%) often exceed their actual tax owed once expenses are properly claimed.

What happens if a contractor doesn’t pay my CIS deductions to HMRC?

The contractor is responsible for paying your deductions to HMRC. If they fail to do so, they face penalties and interest charges – not you. However, you should still report the gross income and deductions on your tax return based on your CIS statements. Keep detailed records in case HMRC queries why deductions don’t match their records.

How long does CIS registration take?

Online CIS registration typically processes within a few days, though it can take up to two weeks during busy periods. You’ll receive a Unique Taxpayer Reference (UTR) if you don’t already have one. Register before you start working for contractors rather than waiting until your first payment is due.

Do limited companies need to register for CIS?

Yes, if your limited company does construction work as a subcontractor for other businesses. Limited companies register for CIS separately from the company registration itself. The company pays corporation tax on profits, but CIS deductions made during the year are offset against the corporation tax bill, potentially creating a refund situation.

Can I have both gross payment status and standard CIS registration?

Gross payment status is the upgrade from standard registration – they’re not separate registrations. Once you qualify for gross payment status (which requires meeting strict turnover, compliance, and business tests), contractors stop making deductions and pay you gross. Most small subcontractors don’t qualify initially but may apply once they’ve established compliance history and meet the turnover thresholds.