The Construction Industry Scheme explained
Under the Construction Industry Scheme, contractors deduct tax from payments to subcontractors and pay it to HMRC. The rate is 20% for registered subcontractors, 30% for unregistered, and 0% for those with gross payment status. Deductions are taken from the labour element only, not materials.
Who the scheme applies to
A contractor is anyone who pays subcontractors for construction work. That includes businesses outside construction which spend more than £3 million on construction in a 12-month period, "deemed contractors", which catches some property investors and large retailers by surprise.
A subcontractor is anyone carrying out construction work for a contractor. Many businesses are both at once: a subcontractor to the main builder, a contractor to their own trades.
Construction operations are drawn widely: site preparation, alterations, repairs, decorating, demolition, and installing heating, lighting and power. Architecture, surveying, carpet fitting and delivering materials are outside it.
The deduction rates
| Subcontractor status | Deduction |
|---|---|
| Registered with HMRC for CIS | 20% |
| Not registered, or failed verification | 30% |
| Gross payment status | 0% |
The difference between 20% and 30% is purely registration. A subcontractor who has not registered is handing HMRC an extra 10% of every invoice as an interest-free loan until their return is filed.
What is deducted from, and what is not
The deduction applies to the labour element only. Materials, plant hire paid for by the subcontractor, and VAT are all excluded.
So an invoice of £2,000 labour plus £800 materials, from a registered subcontractor, suffers £400 of deduction, not £560. Getting invoices split properly between labour and materials is therefore worth real cash flow to the subcontractor.
Contractor obligations
Verify every new subcontractor with HMRC before the first payment, which confirms the correct deduction rate.
File a monthly CIS return by the 19th of each month, even if no payments were made. A nil return is still required and missing it brings a £100 penalty.
Issue a payment and deduction statement to each subcontractor within 14 days of the month end. Subcontractors need these to reclaim.
Pay the deductions to HMRC by the 22nd if paying electronically.
How subcontractors get it back
Sole traders claim the deductions on their Self Assessment return, set against their income tax and Class 4 National Insurance. Because 20% of turnover is usually more than the tax actually due on the profit, most CIS subcontractors are owed a refund.
Limited companies offset CIS deductions against their monthly PAYE liabilities, and reclaim any excess at the end of the tax year.
This guide is general information, current at 10 November 2026. Tax rules change and depend on your circumstances. Please take advice before acting on it.