CIS for Subcontractors: Tax Deductions, Gross Status and Reclaims 2026/27
CIS subcontractors face 20% or 30% tax deductions from invoices. Learn how to apply for gross payment status, reclaim deductions, and avoid common CIS mistakes in 2026/27.
The Construction Industry Scheme (CIS) requires contractors to deduct tax at source from payments to subcontractors. For most registered subcontractors, this means 20% of the labour element of every invoice is withheld and paid directly to HMRC by the contractor. This can create serious cash flow problems if subcontractors do not plan for it -- receiving 80% of the expected payment while HMRC holds the rest until the annual tax return is filed. Understanding the system, achieving gross payment status where possible, and reclaiming deductions efficiently is essential for anyone operating in the construction industry.
How CIS deductions work in practice
When a contractor makes a payment to a CIS subcontractor, they must:
- Verify the subcontractor's CIS registration with HMRC using the online verification service.
- Calculate the CIS deduction on the labour element only of the invoice (excluding materials and VAT).
- Deduct 20% (registered) or 30% (unregistered) from the labour payment.
- Pay the net amount to the subcontractor.
- Pay the deducted amount to HMRC as part of the contractor's monthly CIS return.
- Issue a deduction statement to the subcontractor each month.
Example invoice breakdown:
| Invoice item | Amount |
|---|---|
| Labour | £8,000 |
| Materials | £3,000 |
| Subtotal | £11,000 |
| VAT at 20% | £2,200 |
| Gross invoice total | £13,200 |
CIS deduction = £8,000 x 20% = £1,600
Payment to subcontractor = £13,200 - £1,600 = £11,600 (the contractor retains £1,600 and pays it to HMRC).
The 30% unregistered rate: how to avoid it
If a subcontractor is not registered with HMRC under CIS, or if the contractor cannot verify them using HMRC's online service, the contractor must deduct at 30%. There is no exception. The contractor faces penalties if they fail to deduct at the correct rate.
Registering for CIS takes only a few minutes via the Government Gateway if you have a Unique Taxpayer Reference (UTR). Once registered, HMRC gives you a verification status that contractors can confirm online. There is no reason for any established self-employed tradesperson to be on the 30% rate.
Gross payment status: no deductions at all
The most advantageous CIS status is gross payment status. Under GPS, the contractor pays the subcontractor the full invoice amount without any CIS deduction. The subcontractor settles their tax liability directly with HMRC through self-assessment.
Qualifying conditions for individuals and sole traders:
- Net Construction Turnover: Minimum £30,000 of net construction turnover in the 12 months before application (or £100,000 for partnerships, or £30,000 per director for companies).
- Tax compliance: No significant history of late self-assessment returns, late payment of tax, or outstanding HMRC debts in the current and prior year.
- Business conducted through a UK bank account: The business must receive payments via a bank account in the business name.
- Business in the UK: The business must be conducted in the UK.
The compliance test is strict. HMRC's computer checks your submission history and payment record. A single late return or a missed payment can result in GPS being refused. Once GPS is granted, HMRC reviews it annually and can withdraw it if compliance lapses.
Reclaiming CIS deductions: the self-assessment route
CIS deductions suffered during the tax year (6 April to 5 April) are reclaimed through the annual self-assessment return. On the tax return:
- Declare all income from construction work on the self-employment pages.
- Deduct allowable business expenses.
- The CIS deductions suffered are entered in the tax return as tax already deducted at source.
HMRC calculates your total income tax and Class 4 NI liability and offsets the CIS deductions against it. If deductions exceed the total liability, HMRC issues a refund.
Timeline: For CIS deductions suffered in 2025/26, the refund is available after the return is filed (deadline 31 January 2027 for online filing). Refunds are typically processed within a few weeks of filing.
Accelerated repayment: If you are employed (PAYE) as well as being a CIS subcontractor, you can ask HMRC to offset CIS deductions against your PAYE tax code in-year, receiving the repayment more quickly. Speak to HMRC or use your online tax account.
Reclaiming CIS deductions through payroll (companies)
For limited companies acting as CIS subcontractors, CIS deductions are reclaimed differently:
- The company offsets CIS deductions suffered against its PAYE/NI obligations as an employer.
- The monthly employer payment to HMRC is reduced by the CIS deductions received.
- If deductions exceed the monthly PAYE/NI obligation, the company can carry forward to the next month or apply to HMRC for a repayment.
This means a company with CIS deductions of £5,000 per month and a PAYE bill of £3,000 per month would make no PAYE payment and carry forward £2,000 of CIS credit.
Common mistakes and how to avoid them
Not keeping monthly CIS statements: Contractors must issue statements; subcontractors must keep them. Without statements, you cannot accurately report CIS deductions on your tax return and HMRC may dispute the amounts.
Claiming materials as labour: Contractors must correctly split invoices between labour and materials. Errors that overstate the labour element result in excess CIS deductions being withheld.
Failing to register for CIS: New entrants to construction work should register before issuing their first invoice. Registering after the fact does not reduce the 30% deductions already suffered.
Missing the self-assessment deadline: CIS subcontractors who miss the 31 January online filing deadline lose immediate access to their refund and face late filing penalties. File on time every year.
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Open Self-Employed Tax calculatorFrequently asked questions
What is the CIS standard deduction rate in 2026/27?
The standard CIS deduction rate is 20% of the labour element of the subcontractor's invoice (excluding VAT and the cost of materials). This applies to subcontractors who are registered with HMRC under CIS. Unregistered subcontractors face a higher 30% deduction.
Why is the CIS deduction rate 30% for some subcontractors?
The 30% higher deduction rate applies when a subcontractor has not registered for CIS with HMRC, or when the contractor cannot verify the subcontractor's registration status using HMRC's verification service. Registering for CIS before starting work is essential to avoid the 30% deduction rate.
What is CIS gross payment status?
Gross payment status means the contractor pays the subcontractor in full without making any CIS deduction. To qualify, the subcontractor must demonstrate to HMRC: a turnover of at least £30,000 (for individuals; £100,000 for partnerships and companies), a clean tax compliance record (no late returns or payments), and a bank account in the business name. Gross status is reviewed annually by HMRC.
How do I apply for gross payment status?
You can apply for gross payment status through your Government Gateway account or by contacting HMRC's CIS helpline. HMRC checks your tax compliance record for the current and previous tax year before granting gross status. If approved, HMRC notifies you and your contractors can then pay you gross. Gross status can be withdrawn if you fall behind on tax obligations.
How do I reclaim CIS deductions suffered?
CIS deductions are reclaimed through your annual self-assessment tax return. The deductions appear on your tax return as tax already paid, offsetting your income tax and Class 4 NI liability. If deductions exceed your tax bill, HMRC will issue a refund. You can also reclaim through payroll if you have employees and the CIS deductions relate to the business -- but most subcontractors reclaim through self-assessment.
What should a CIS monthly statement from the contractor contain?
Contractors must give subcontractors a payment and deduction statement each month they make CIS payments. The statement must show: the contractor's name and UTR, the subcontractor's name and UTR, the payment period, gross payment, deductions for materials, and the amount of CIS tax deducted. Subcontractors need these statements to complete their tax return accurately.
What are the most common CIS mistakes made by subcontractors?
Common mistakes include: not registering for CIS before starting work (resulting in 30% deductions), not keeping CIS statements from contractors, not reclaiming CIS deductions on the self-assessment return, claiming CIS deductions against the wrong tax year, and failing to declare all income received (HMRC cross-checks CIS returns submitted by contractors).
Do CIS deductions apply to VAT on the invoice?
No. CIS deductions are calculated on the labour element of the invoice only, before VAT. If the invoice is £10,000 labour + £2,000 materials + £2,400 VAT, the CIS deduction is calculated on £10,000 (the labour element) at 20% = £2,000. The contractor deducts £2,000 and pays the subcontractor the net amount (£10,000 - £2,000 = £8,000 plus the £2,000 materials and the VAT separately).
Can limited companies be CIS subcontractors?
Yes. Limited companies can be CIS subcontractors as well as sole traders and partnerships. The company registers for CIS using its registered company number and corporation tax UTR. CIS deductions suffered by a limited company are offset against the company's PAYE/NI obligations to HMRC rather than through a self-assessment return.
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