If your business operates in construction, you may already know that the rules are not always straightforward. The Construction Industry Scheme, or CIS, adds another layer that many contractors and subcontractors either overlook or misunderstand - until HMRC comes calling.

CIS affects how payments are made, how tax is handled, and what reports must be filed every month. It applies to thousands of UK businesses and individuals, and the consequences of getting it wrong include penalties, cash flow problems, and unwanted HMRC attention.

In this blog, we break down who CIS applies to, what your responsibilities are, and how you can stay compliant without adding unnecessary admin to your day.

What Is CIS and Who Must Follow It?

The Construction Industry Scheme is a tax deduction scheme set up by HMRC. It applies to most construction work done in the UK, including:

• Site preparation

• Demolition and dismantling

• Building work

• Alterations, repairs, and decorating

• Installation of systems like heating or lighting

• Cleaning of buildings after construction work

Under CIS, contractors must deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments toward the subcontractor’s tax and National Insurance.

If you are a contractor, you must register for CIS. If you are a subcontractor, you can choose whether or not to register, but registration typically reduces the rate of deduction.

Who Counts as a Contractor or Subcontractor?

A contractor is a business or individual that pays subcontractors to do construction work. This can include:

• Construction companies

• Property developers

• Local authorities

• Housing associations

• Even some businesses in other industries if they spend more than £3 million on construction in a year

A subcontractor is a business or individual that carries out construction work for a contractor. This could include:

• Sole traders

• Partnerships

• Limited companies

• Labour-only subcontractors

You can be both a contractor and a subcontractor at the same time, depending on who you work for and how you operate.

What Contractors Must Do Under CIS:

If you are a contractor, you have specific obligations. These include:

Registering as a contractor with HMRC: This must be done before you make any payments to subcontractors under CIS.

Verifying your subcontractors: You must check with HMRC whether the subcontractor is registered, and at what deduction rate—standard (20 percent), higher (30 percent), or gross (0 percent).

Making deductions from payments: Before paying your subcontractor, you must deduct the correct amount of CIS tax based on their status. You must then pay this to HMRC.

Filing monthly CIS returns: Every month, you must submit a return to HMRC listing all subcontractors you paid, how much you paid them, and what you deducted.

Providing deduction statements to subcontractors: You must give each subcontractor a monthly statement showing the payment amount and how much tax was deducted and submitted to HMRC on their behalf.

Keeping records: All CIS payments and deductions must be clearly recorded and stored in case of HMRC review or inspection.

What Subcontractors Must Do Under CIS

If you are a subcontractor:

You can register with HMRC as a CIS subcontractor: This reduces the deduction rate from 30 percent to 20 percent. It also helps you stay visible to HMRC and improves your ability to reclaim tax later.

You can apply for gross payment status: If you meet certain conditions (such as good compliance history, a UK bank account, and business activity), you can apply for gross payment status. This means contractors do not deduct tax, and you handle it through your annual tax return instead.

You must keep accurate records: Even if the contractor handles deductions, you are still responsible for declaring your income and managing your tax obligations correctly.

You must account for tax already deducted: When you complete your Self Assessment or Corporation Tax return, you must include the CIS tax that was already paid to HMRC on your behalf.

Common CIS Mistakes and How to Avoid Them

The Construction Industry Scheme is detailed and easy to get wrong. The most frequent errors we see include:

• Failing to verify a subcontractor with HMRC before payment

• Applying the wrong deduction rate

• Paying subcontractors without making any deductions at all

• Missing the monthly return deadline

• Forgetting to provide deduction statements to subcontractors

• Not keeping proper records of payments and deductions

• Subcontractors not registering and losing 30 percent to deductions unnecessarily

• Assuming that CIS covers all types of work or workers (it does not)

These mistakes can lead to penalties, late payment interest, and increased attention from HMRC. In some cases, they can cause serious cash flow problems, especially if deductions are applied too late or inaccurately.

Monthly Returns and Deadlines

If you are a contractor, you must file a CIS return each month. The deadline is always the 19th of the following month. For example, the return for payments made in April is due by 19 May.

Even if you made no payments that month, you still need to submit a nil return. Failing to do so leads to automatic penalties.

CIS returns can be submitted through your accounting software or directly via HMRC’s online services.

You must also send a monthly deduction statement to each subcontractor. This shows them:

• How much you paid

• How much you deducted

• Their current deduction rate

• The period the statement covers

These statements are important for subcontractors to reclaim tax or complete their returns accurately.

How Allied Financial Group Supports CIS Clients

At Allied Financial Group, we work with contractors and subcontractors across the UK to make sure CIS does not become a source of stress or risk.

Our services include:

• CIS registration for both contractors and subcontractors

• Verification of subcontractors and management of deduction rates

• Monthly CIS returns and submission to HMRC

• Creation and delivery of subcontractor deduction statements

• Record keeping and digital filing

• Help with gross payment status applications

• Advice on whether work falls under CIS or not

We also integrate CIS tracking into your wider bookkeeping and tax planning. That way, you are not managing it separately or guessing how it fits into the bigger picture.

CIS does not have to be complicated. With the right support, you can stay compliant, reduce admin, and make sure everyone gets paid correctly and on time.