If you run a business in the construction industry, you’ve likely come across the Construction Industry Scheme, or CIS. It’s a system HMRC uses to collect tax from subcontractors working in construction. Under this scheme, contractors must deduct a percentage from payments made to subcontractors and pass it on to HMRC. This deduction is treated as advance payment towards the subcontractor’s tax and National Insurance. While the rules are clear in theory, many businesses struggle to stay on top of their monthly responsibilities, leading to penalties, delays, and unnecessary admin. In this blog, we explain what CIS involves, who needs to register, what is required every month, and how AFG helps construction businesses stay compliant and confident.
The Construction Industry Scheme applies to most construction work in the UK. This includes general building, groundwork, demolition, repairs, decorating, roofing, civil engineering, and related trades. If you are a contractor paying subcontractors for construction work, you must register with HMRC under the scheme. If you are a subcontractor being paid for construction work, you must also register. Once registered, subcontractors are deducted either 20 or 30 percent of the labour portion of their invoice. Those who meet HMRC’s strict compliance criteria can apply for gross payment status, meaning they receive their full payment with no deduction at source.
Contractors must register before they take on any subcontractors. You are considered a contractor if your business pays others for construction work or if your organisation spends more than £3 million on construction in a 12-month period. Subcontractors, whether sole traders or limited companies, must also register. Failing to do so means a higher deduction rate of 30 percent will apply, reducing your cash flow and delaying tax recovery. Even if you only do occasional construction work or work under different business structures, registration is still required once the work falls under HMRC’s CIS scope. Some businesses fall into both categories and must register as both contractor and subcontractor.
As a contractor, your first obligation is to verify each subcontractor with HMRC before payment. This determines the correct deduction rate. Each month, you must calculate and deduct the appropriate tax, submit a CIS return to HMRC, and issue deduction statements to all subcontractors. These statements show how much has been deducted and paid to HMRC on their behalf. The monthly CIS return is due by the 19th of the following month, and payment must reach HMRC by the 22nd if made electronically. You are required to keep full CIS records, including invoices, deduction statements, and verification results for at least three years. Even if no subcontractors were paid in a particular month, you must still submit a nil return.
Subcontractors must ensure they are properly registered and keep records of all CIS deduction statements received. These deductions are not the final tax amount owed but are treated as advance tax payments. At year-end, you must submit a Self Assessment or Corporation Tax return, and these deductions are offset against your final liability. If you’ve overpaid, you can request a refund. If you’ve underpaid, you will need to pay the balance. Subcontractors can apply for gross payment status if they meet certain conditions, including filing all tax returns on time, paying tax when due, and operating through a registered business bank account. Maintaining gross payment status requires ongoing compliance, and HMRC reviews this annually.
Deductions are only made from the labour portion of an invoice. Materials, equipment hire, and VAT are excluded. If you are VAT registered, contractors should pay your VAT in full. For example, if your invoice totals £1,000 for labour and £200 for materials, and you are a registered subcontractor, the contractor would deduct 20 percent from the £1,000 labour amount, paying £200 to HMRC and £1,000 to you (£800 for labour and £200 for materials). You will also receive a deduction statement showing the breakdown of what was paid and withheld. These records are essential when submitting your tax return or claiming back overpaid tax.
Late submission of a CIS return results in automatic penalties, starting at £100 even if no tax is due. If the return is more than two months late, the penalty rises to £200, and further penalties apply at six and twelve months. If errors are discovered later and not corrected promptly, further fines may be issued. Repeated mistakes or missed deadlines may also affect your subcontractors’ ability to claim gross status or reclaim tax. Contractors who submit incorrect returns, under-deduct, or fail to verify subcontractors correctly may be liable for the shortfall. The cost of getting it wrong quickly adds up, both financially and reputationally.
Verifying each subcontractor with HMRC before payment is a legal requirement. It confirms whether the subcontractor is registered and what deduction rate to apply. You must not rely on verbal confirmation or status from previous contracts. Each subcontractor must be verified individually, and their status must be checked regularly. If you fail to verify or use an incorrect deduction rate, HMRC can hold you responsible for the underpaid tax. Verification is usually done through your CIS agent, accounting software, or HMRC’s online services. Once verified, you will receive a unique reference and deduction rate to use for that subcontractor.
Managing CIS internally can become time-consuming, especially for contractors handling multiple subcontractors and projects. The work involves monthly returns, accurate record-keeping, ongoing verification, reconciliation, and clear communication with subcontractors. Many construction firms choose to outsource their CIS obligations to reduce the risk of non-compliance and free up internal time. Outsourcing also ensures you stay up to date with rule changes, software updates, and evolving HMRC expectations. With expert support, you do not have to worry about missed filings or incorrect deductions.
At Allied Financial Group, we work closely with contractors and subcontractors across the construction industry. For contractors, we take care of everything from verifying new subcontractors to preparing monthly CIS returns, submitting them to HMRC, and issuing compliant deduction statements. We manage your CIS ledger, flag issues, and prepare supporting documents if HMRC conducts an inspection. For subcontractors, we assist with registration, tracking monthly deductions, and ensuring those figures are correctly applied when filing tax returns. Whether you are a limited company or a sole trader, we make sure your CIS position is managed properly and in line with your wider financial planning. We also monitor eligibility for gross payment status and support you in applying or reapplying when needed. If your business falls into both contractor and subcontractor roles, we help manage both sets of obligations in a joined-up, efficient way.
CIS is not just another tax obligation - it affects your cash flow, your reputation, and your working relationships. When you stay on top of CIS responsibilities, subcontractors get accurate statements on time, tax is paid correctly, and HMRC has no reason to question your position. But when things slip, even unintentionally, the penalties and disruption are immediate. Gross payment status can be lost. Refunds can be delayed. Projects can stall. A well-managed CIS process reduces stress, cuts risk, and keeps your operations moving forward without administrative bottlenecks. At AFG, our goal is simple. We take care of the rules, so you can focus on the work.
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