The Construction Industry Scheme trips up more subbies than almost anything else on site. Not because it’s impossibly complicated, but because nobody sits you down and walks you through it properly. You finish a job, get paid less than you invoiced, and suddenly you’re Googling what just happened. I’ve been there. Most of us have. So let’s fix that right now with a straight run-through of how CIS actually works in 2026.
What the CIS scheme is and who it applies to
The Construction Industry Scheme is a system run by HMRC that governs how payments are made between contractors and subcontractors working in construction. The contractor doesn’t pay the subbie the full invoice amount. Instead, they deduct a percentage and send it directly to HMRC, which is credited against the subbie’s tax and National Insurance bill at the end of the year.
It applies to anyone doing construction work in the UK, which covers a wide range of trades: groundworkers, bricklayers, electricians, plumbers, carpenters, roofers, plasterers, painters. If you’re self-employed and working for a main contractor on a build, CIS almost certainly applies to you. It also applies to limited companies acting as subcontractors. The scheme doesn’t cover direct employees, who go through PAYE as normal.
How the deduction rates work
There are three possible rates, and which one applies to you depends on your registration status with HMRC.
If you’re registered under CIS as a standard subcontractor, the contractor deducts 20% from your labour (not materials). If you’re not registered at all, that rate jumps to 30%. That’s the punishing one, and it catches sole traders who didn’t bother to register when they started. The deduction only applies to the labour portion of your invoice, so if you’re supplying materials as well, those pass through at full value without any deduction taken off.
The third rate is 0%, which is gross payment status. We’ll get to that in a minute because it’s worth understanding properly.
Registering under CIS: what you actually need to do
If you’re a sole trader or running a small limited company and you’re doing subcontract work in construction, you need to register with HMRC as a subcontractor. You can do this through your Government Gateway account online. You’ll need your Unique Taxpayer Reference (UTR), National Insurance number, and your business name if you’re trading under one.
Once registered, the contractor can verify you with HMRC before making the first payment. That verification check is what tells them your correct deduction rate. If they can’t verify you, they have to deduct at 30%, even if you’re genuinely registered. So make sure your details are accurate and up to date.
Gross payment status: how to get it and why it matters
Gross payment status means you get paid your full invoice with nothing deducted. The contractor still has to verify you with HMRC, but when they do, HMRC tells them your rate is 0%. You then handle your own tax through Self Assessment like any other self-employed person.
To qualify, HMRC checks three things: your business must be based in the UK and doing construction work; your annual turnover (minus materials) must generally hit a threshold, currently £30,000 for sole traders; and you must have a clean tax compliance record. That last one is the sticking point. If you’ve got outstanding returns or payments due to HMRC, they won’t grant it.
Gross payment status makes cash flow much easier to manage. You’re not waiting until the end of the year for a rebate on deductions you didn’t need to make in the first place. If you’re turning over solid numbers and your tax affairs are in order, it’s worth applying. You can do it through your Government Gateway account. HMRC reviews it annually, so keep your affairs tidy or you’ll lose it.
Monthly returns: what contractors must do
If you’re a contractor (which includes sole traders who take on subbies), CIS requires you to submit a monthly return to HMRC. This lists every subcontractor you paid in that tax month, how much you paid, and how much you deducted. The deadline is the 19th of each month for the previous tax month.
Miss it, and there’s an automatic £100 penalty. Miss it by more than two months and it climbs. HMRC is not lenient on this. I know contractors who’ve built up hundreds of pounds in penalties just from being disorganised. The return can be submitted through HMRC’s online portal or via accountancy software. If you had no subcontractor payments in a month, you can declare a nil return, but you still have to submit it.
Common mistakes that trigger penalties
Not verifying a subcontractor before payment is one of the most common errors. You can’t just assume someone’s registered; you have to check, and HMRC expects a record of that verification. Paying a subbie at the wrong rate because you skipped the check lands the liability on you as the contractor.
Another big one is failing to give subcontractors a payment and deduction statement. Every time you make a payment with a CIS deduction, the subbie is entitled to a written statement showing the gross amount, any deduction taken, and the net paid. That statement is what they use to offset the deduction against their tax bill. If you don’t issue it, you’re leaving them unable to reclaim what’s theirs.
Subbies also make mistakes. Putting materials and labour into the same line on an invoice without separating them means the contractor might deduct CIS on the whole lot, including the materials, which they shouldn’t be doing. Keep your invoices clear: labour on one line, materials on another.
Late or missed Self Assessment returns are another trap. The deductions taken from you across the year are credits against your tax bill, but HMRC only applies them when you file your return. Miss the 31 January deadline and you’re paying a penalty on top of whatever tax you owe. Given how many tradesmen are now juggling retrofit jobs and EPC-related work (you can read more about how that landscape is shifting in our EPC ratings guide for UK builders), keeping the admin side tight matters more than ever.
How CIS interacts with VAT if you’re VAT-registered
CIS deductions are applied to the net invoice value before VAT. So if you invoice £1,000 for labour plus 20% VAT (£200), making £1,200 total, the contractor deducts 20% CIS from the £1,000, not from £1,200. They pay you £800 plus the full £200 VAT, making £1,000 in your pocket. The £200 deduction goes to HMRC. VAT still gets passed on in full; it doesn’t interact with the CIS calculation.
If you’re not yet VAT-registered, check the current threshold on GOV.UK. If your turnover’s climbing, you might need to register sooner than you think, especially if you’re picking up larger contracts.
Getting a CIS deduction refund
If more has been deducted from you in a tax year than you actually owe in tax and NI, HMRC refunds the difference. This happens through your Self Assessment return. It can take a few weeks after filing for the refund to land, but it does come. For sole traders who are on top of their bookkeeping, this is often a decent lump sum in February or March, which is useful for tooling up or covering quiet periods in spring.
Keep every payment and deduction statement your contractors give you. They’re your evidence. If records are missing, you’ll be chasing contractors for duplicates and potentially delaying your refund.
Running a construction business involves a lot more than the physical work on site. Understanding CIS is a big part of keeping yourself compliant and solvent. If you’re also thinking about how your business structure affects things like VAT registration or labour-only rates, the same principle applies: the paperwork side isn’t optional, it’s part of the job. Treat it that way and you’ll rarely have a problem with HMRC.
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