Construction Industry Scheme (CIS): Complete Guide for Contractors 2026/27

The Construction Industry Scheme (CIS) is a tax deduction scheme run by HMRC that applies to payments made by contractors to subcontractors in the construction industry. If you pay subcontractors for construction work, you are almost certainly required to operate CIS -- and the penalties for getting it wrong can be significant.

This guide covers the key mechanics of CIS for 2026/27, including registration, deduction rates, monthly returns and how subcontractors reclaim overpayments.

Who Must Register for CIS?

CIS applies to contractors -- businesses or individuals that pay subcontractors for construction work. You must register as a contractor if:

• You pay subcontractors for construction operations, or
• Your average annual spend on construction operations exceeds GBP 1 million (making you a "deemed contractor" even if your main business is not construction -- such as a supermarket chain refurbishing its stores)

Subcontractors -- those who carry out construction work for contractors -- must also register with HMRC under CIS to receive the standard 20% deduction rate. Without registration, 30% is deducted.

What Is "Construction"?

The scheme covers most work on UK land or buildings, including:

• Site preparation and clearing
• Building and demolition work
• Alterations, repairs and decorating
• Installing systems (heating, lighting, drainage, power)
• Landscaping that forms part of a construction project

Excluded activities include architecture and surveying, scaffolding hire (where no labour is supplied), carpet fitting and manufacturing of components off-site.

CIS Deduction Rates

HMRC operates three deduction levels:

Deductions apply only to the labour element of payments -- materials, plant hire and fuel costs that are separately itemised on invoices are not subject to CIS deduction.

How to Qualify for Gross Payment Status

Gross payment status (GPS) allows subcontractors to receive payments in full with no CIS deduction -- the most cash-flow-friendly outcome. To qualify, HMRC looks at:

1. Compliance test: All tax returns and payments must be up to date for the past 12 months
2. Business test: The business must be a genuine construction business with a bank account in the business name
3. Turnover test: Net construction turnover must exceed GBP 30,000 (sole traders) or GBP 30,000 per director/shareholder (companies, up to GBP 100,000 minimum)

HMRC reviews GPS holders annually and can withdraw status if compliance deteriorates.

Contractor Obligations: Before You Pay

Before making any payment to a subcontractor, contractors must verify the subcontractor with HMRC. This can be done:

• Online through HMRC's CIS verification service
• Via commercial payroll or accounting software
• By calling the CIS helpline (0300 200 3210)

Verification confirms whether the subcontractor is registered and what deduction rate applies. Keep verification reference numbers -- HMRC may ask for them during compliance checks.

Monthly CIS Returns

Contractors must file a monthly CIS return with HMRC by the 19th of each month (26th for online filing). Each return must show:

• Every subcontractor paid during the month
• The gross amount of each payment (excluding VAT)
• The amount paid for materials (excluded from deduction)
• The deduction made

If you have made no payments in a month, you must still file a nil return or notify HMRC that you are "inactive" for the month. Failing to file attracts automatic penalties:

• GBP 100 for one month late
• GBP 200 for two months late
• Greater of GBP 300 or 5% of the deductions due for three or more months late

Paying Deductions to HMRC

CIS deductions withheld from subcontractors must be paid to HMRC each month alongside PAYE and employer National Insurance. The combined payment is due by the 19th of each month (22nd electronically). Missing this deadline triggers interest and potential surcharges.

Subcontractors: Reclaiming CIS Deductions

CIS deductions are advance payments of your income tax and National Insurance liability. When subcontractors complete their Self Assessment tax return, they report:

• Gross CIS income
• Allowable expenses
• The total CIS deductions suffered during the year

HMRC calculates the actual tax and NI due on profits. If deductions exceed the liability -- which happens frequently for subcontractors with high material costs or those who work only part of the year -- HMRC issues a refund.

To claim a refund promptly, file your Self Assessment return as early as possible after 6 April. HMRC typically processes CIS repayments within 4--6 weeks of receiving a return.

Record-Keeping Requirements

Contractors must keep CIS records for at least three years after the end of the tax year. Required records include:

• Subcontractor verification references
• Copies of payment and deduction statements issued to subcontractors
• Monthly CIS return submissions and payment records

Subcontractors should retain deduction statements (also called CIS vouchers) issued by each contractor -- these form the basis of the refund claim on Self Assessment.

Common CIS Mistakes to Avoid

1. Failing to verify before payment -- if HMRC cannot verify a subcontractor, you must use the 30% rate
2. Deducting from materials -- deductions apply to labour only; deducting from materials overpays HMRC and creates cash-flow problems for subcontractors
3. Missing monthly return deadlines -- even a few days late triggers a GBP 100 penalty
4. Not filing nil returns -- required even in months with no payments

VAT and CIS: The Reverse Charge

Since March 2021, most B2B construction services subject to CIS are also subject to the domestic reverse charge for VAT. Under this system, the recipient of the service (the contractor) accounts for VAT rather than the supplier (the subcontractor). This is separate from CIS deductions and must be handled correctly in your accounting software. End customers (those not in the CIS supply chain) are excluded.

Use our CIS Deduction calculator to quickly calculate what to deduct from any subcontractor payment.