CIS explained: how the Construction Industry Scheme deductions actually work
If you work in construction as a subcontractor, the Construction Industry Scheme (CIS) decides how much of your invoice you actually receive. If you engage subcontractors, it makes you a tax collector for HMRC. Here’s how the deductions work, what they apply to, and how to stop losing 30% when you should be losing 20% — or nothing at all.
The three deduction rates
Under CIS, a contractor deducts tax from the labour element of a subcontractor’s payment and passes it to HMRC:
- 20% — the standard rate, for subcontractors registered with HMRC for CIS
- 30% — the higher rate, for subcontractors who are not registered or can’t be verified
- 0% (gross payment status) — for subcontractors who pass HMRC’s turnover, business and compliance tests and are paid in full
What the deduction applies to — and what it doesn’t
Deductions apply to the labour part of the payment only. Before calculating the deduction, the contractor excludes VAT and the cost of materials the subcontractor paid for, plant hire, fuel (except travel fuel) and manufacturing or prefabricating materials.
This is why itemising materials properly on every invoice matters: lump-sum invoices with no materials breakdown get the deduction applied to the whole amount, and you wait until your tax return to get the difference back.
The deductions aren’t lost — they’re prepaid tax
CIS deductions are advance payments towards the subcontractor’s income tax and National Insurance. Sole traders reclaim or offset them through Self Assessment — for many subbies the deductions overshoot their actual liability and produce a refund after the tax year ends. Limited company subcontractors offset deductions against their PAYE liabilities in-year through the EPS.
The contractor must give you a payment and deduction statement for every month they deduct — keep them all; they are your evidence for the reclaim.
Contractor obligations
If you pay subcontractors for construction work, you must:
- Register as a CIS contractor before taking on your first subcontractor
- Verify each subcontractor with HMRC to learn which deduction rate to apply
- Deduct at the verified rate and file a CIS return every month (due by the 19th) — late returns attract automatic penalties
- Give each subcontractor a monthly payment and deduction statement
Gross payment status and the VAT reverse charge
Gross payment status means no deductions at all — you’re paid in full and settle your tax through your return. To qualify you must run the business through a bank account, have filed and paid on time, and meet the turnover test: broadly £30,000 of construction turnover for a sole trader (per partner or director for partnerships and companies, or £100,000 for the whole firm). HMRC reviews compliance annually and can withdraw it.
Separately, since March 2021 the VAT domestic reverse charge applies to most VAT-registered, CIS-reported supplies between construction businesses: the customer accounts for the VAT instead of paying it to you, and your invoice must state that the reverse charge applies. It changes cash flow — you no longer hold VAT between quarters.
Keeping CIS paperwork straight
CIS punishes messy paperwork: unverified subbies cost 10 extra percentage points, missing materials breakdowns inflate deductions, and lost statements delay refunds. TradeHub OS invoices itemise labour and materials separately, sync to Xero for CIS returns, and keep every job’s quotes, invoices and payments in one place — so the numbers your accountant needs already exist.
This guide is general information for UK trades and landlords, not legal advice. Always refer to the current regulations and official guidance from the HSE, Gas Safe Register or your competent-person scheme.
