Construction Industry Scheme (CIS): Complete Guide 2026/27
CIS deduction rates, contractor vs subcontractor obligations, monthly returns, claiming back overpaid CIS and how to apply for gross payment status -- all 2026/27 figures.
What is the Construction Industry Scheme?
The Construction Industry Scheme (CIS) is a HMRC tax deduction mechanism for the construction industry. Contractors deduct money from payments to subcontractors and pass it to HMRC as an advance payment towards the subcontractor's tax and NI bill.
CIS was introduced to tackle widespread tax evasion in the construction sector where subcontractors were paid cash and did not declare income. It does not change the amount of tax ultimately owed -- it is a withholding mechanism.
Scope of CIS
CIS covers construction operations in the UK, which includes:
- Building, demolition, alteration, and repair of permanent structures.
- Installation of systems (heating, plumbing, electrical, ventilation).
- Painting and decorating (as part of construction work).
- Civil engineering works.
Not covered by CIS:
- Architecture and surveying.
- Carpet fitting (not fixed).
- Scaffolding hire-only contracts (no labour).
- Manufacturing off-site (components, materials).
- Drilling for oil/gas.
Contractor vs subcontractor
Who is a contractor?
A contractor is a business that:
- Pays subcontractors for construction work, or
- Is not in the construction business but spends more than £3 million on construction work in any rolling 12-month period (a "deemed contractor").
Contractors must register for CIS with HMRC before making their first payment to a subcontractor.
Who is a subcontractor?
A subcontractor is any individual, partnership, or company that carries out construction work for a contractor. A business can be both a contractor and a subcontractor at the same time (e.g. a main contractor who is itself a subcontractor on a larger project).
Subcontractors should register for CIS to receive the standard 20% deduction rate rather than the higher 30% rate applied to unregistered workers.
CIS deduction rates 2026/27
HMRC applies three deduction rates:
| Status | Deduction Rate |
|---|---|
| Gross payment status | 0% |
| Registered subcontractor | 20% |
| Unregistered subcontractor | 30% |
Deductions apply to the labour element only. Materials, plant hire (where the subcontractor owns the plant), fuel (except for plant) and consumables used exclusively on the job are excluded from the deductible amount.
Example:
A subcontractor invoices £4,000 for a job. The invoice includes £1,500 for materials and £2,500 for labour. The contractor deducts CIS on the £2,500 labour element only:
- Registered at 20%: deduction = £500, payment to subcontractor = £3,500.
- Unregistered at 30%: deduction = £750, payment = £3,250.
- Gross payment status: deduction = £0, payment = £4,000.
Contractor obligations
1. Verify subcontractors
Before making the first payment, contractors must verify the subcontractor's status with HMRC. This is done online through HMRC's CIS verification service or via payroll/accounting software. HMRC tells the contractor which rate to apply.
Verification can be done by phone (0300 200 3210) or online. Contractors must keep records of the verification reference.
2. Apply the correct deduction
After verification, apply the rate HMRC specifies. If HMRC cannot find the subcontractor's details, the 30% unregistered rate applies automatically.
3. Submit monthly CIS returns
Contractors must file a monthly CIS return by the 19th of each month (for payments made in the previous tax month). The return lists:
- Each subcontractor paid.
- Gross payment amount (before deduction).
- Amount of materials (excluded from deduction).
- Deduction made.
Returns can be submitted online via HMRC's CIS service or commercial software. Nil returns are required even if no payments were made (unless HMRC has agreed to a temporary exemption).
Penalties for late monthly returns:
- 1 day late: £100.
- 2 months late: £200.
- 6 months late: £300 or 5% of deductions due (whichever is higher).
- 12 months late: further £300 or 5%.
4. Provide payment and deduction statements
Contractors must give each subcontractor a payment and deduction statement (formerly called a CIS voucher) showing the gross amount, deduction, and net payment. This must be provided within 14 days of the end of each tax month.
Subcontractor obligations
Register with HMRC
Subcontractors should register for CIS at www.gov.uk/register-as-a-subcontractor. Registration can be done online if you have a Government Gateway account, or by calling the CIS helpline.
You will need your:
- Unique Taxpayer Reference (UTR).
- National Insurance number (individuals) or company registration number (companies).
Keep records
Subcontractors must keep records of:
- All CIS deduction statements received from contractors.
- Gross amounts paid and deductions suffered.
These records are needed to complete the Self Assessment return or Corporation Tax return.
Claiming back overpaid CIS
CIS deductions are advance payments towards tax liability. Most subcontractors will overpay during the year because the deductions are applied to gross income without accounting for allowable expenses.
Sole trader / individual
CIS deductions suffered are entered on the Self Assessment tax return (SA100). The total deductions are set against the final income tax and Class 4 NI liability. If deductions exceed the liability, HMRC issues a repayment.
Example:
A self-employed subcontractor earns £40,000 gross. After deducting £15,000 in materials and expenses, taxable profit is £25,000. Income tax + NI on £25,000 is approximately £4,056. CIS deductions suffered (20% x £40,000 labour) = £8,000. HMRC repayment due: £8,000 - £4,056 = £3,944.
The Self Assessment deadline is 31 January for online filing. Repayments are typically processed within 4-6 weeks.
Limited company subcontractor
A company suffering CIS deductions can:
- Offset CIS deductions against the company's own PAYE/NI liability -- this is the most efficient route (form CIS132).
- Reclaim via the Corporation Tax return if the PAYE offset is insufficient.
HMRC allows CIS deductions to be set against employer PAYE, employee NI, employer NI, and CIS deductions the company itself makes as a contractor.
Gross payment status
Subcontractors with gross payment status receive payments in full with no CIS deduction. This is highly valuable for cashflow.
Eligibility criteria
To obtain gross payment status, a subcontractor must:
- Business test: be carrying on a construction business in the UK (or intend to within 30 days).
- Turnover test:
- Individuals: net construction turnover of at least £30,000 in the 12 months before application.
- Partners in a partnership: £30,000 each or £200,000 for the business as a whole.
- Companies: £30,000 per director or £200,000 turnover.
- Compliance test: be up to date with all HMRC obligations -- tax returns filed on time, no unpaid tax, no penalties in the past 12 months.
The compliance test is strict. A single late payment or unfiled return in the previous year can disqualify an application.
Maintaining gross payment status
HMRC reviews gross payment status annually. If a subcontractor fails the compliance test during the year, HMRC will cancel gross payment status with 90 days notice. The subcontractor then returns to the 20% rate.
Interaction with VAT reverse charge
From 1 March 2021, the domestic reverse charge for VAT applies to most construction services caught by CIS. This means the customer (contractor) accounts for the VAT rather than the subcontractor. CIS deductions continue to apply separately -- the reverse charge does not replace or remove CIS obligations.
Zero-rated supplies and supplies to end-users (those who do not make onward supplies of construction) are excluded from the reverse charge.
Common mistakes to avoid
- Deducting on materials: CIS deductions should only apply to labour. Incorrectly deducting from the full invoice overpays CIS and creates a reconciliation headache.
- Missing monthly returns: even if you paid no subcontractors, a nil return is required (unless HMRC confirms otherwise).
- Failing to verify: using 20% without verification is risky -- HMRC may not match the subcontractor and the 30% rate could be required.
- Ignoring the compliance test: any company aspiring to gross payment status must maintain a spotless compliance record throughout the year.
Sources
Frequently asked questions
What are the CIS deduction rates for 2026/27?
20% for registered subcontractors, 30% for unregistered subcontractors, and 0% for subcontractors with gross payment status. Deductions are applied to the labour element of payments only -- materials are excluded.
Who must register as a CIS contractor?
Any business that pays subcontractors for construction work must register as a contractor. This includes property developers, landlords spending more than £3 million on construction in any 12-month period, and businesses in non-construction sectors that commission construction work above this threshold.
How do I reclaim overpaid CIS deductions?
Self-employed subcontractors reclaim through Self Assessment -- CIS deductions suffered are offset against the tax liability on the SA return. Limited company subcontractors reclaim through Corporation Tax returns or by offsetting CIS suffered against employer PAYE/NI.
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