How CIS actually works end to end — registration, verification, deduction rates, Gross Payment Status, VAT and retention — for contractors and subcontractors who want the full picture, not just one number.
Checked · 2026/27 tax yearThe Construction Industry Scheme is HMRC's system for collecting tax at source on construction work. Instead of a subcontractor being paid in full and settling their tax bill later, the contractor deducts money from each payment and sends it to HMRC directly — an advance against the subcontractor's own Income Tax and National Insurance for the year, not an extra cost on top.
CIS covers most construction operations in the UK: site preparation, demolition, general building work, alterations, repairs, and installation — carried out by anyone from a sole trader to a limited company. It doesn't apply to work like architecture, surveying, scaffolding hire on its own (without labour), or delivering materials with no other involvement.
You can sit on either side of the scheme, or both: a business that pays subcontractors is a contractor for CIS purposes even if construction isn't its main trade, once it spends over a certain amount on construction within a rolling 12 months.
Contractors must register with HMRC if they pay subcontractors for construction work, or if they're a business outside construction that spends more than £3 million on construction operations within any 12-month period. Registration happens through your HMRC online account, and once registered you're responsible for verifying subcontractors, applying deductions, filing monthly returns and issuing payment statements.
Subcontractors aren't legally required to register — but if you don't, contractors have to deduct at the higher 30% rate instead of 20%, purely because HMRC has no verified record to check the lower rate against. For almost everyone doing regular construction work, registering is worth the ten minutes it takes.
Before a contractor makes the first payment to a subcontractor on a new contract, they must verify that subcontractor with HMRC — using the subcontractor's Unique Taxpayer Reference (UTR) and, for individuals, National Insurance number, through the Government Gateway or CIS-compatible software. HMRC's response tells the contractor which of the three rates to apply.
Verification isn't optional paperwork: get it wrong, under-deduct, and HMRC pursues the contractor for the shortfall — not the subcontractor. That's the single most common reason CIS goes wrong on smaller jobs, where a contractor pays a new subcontractor without checking first.
Whichever rate applies, it's only ever charged on the labour portion of an invoice. Genuine materials the subcontractor paid for directly — timber, fixings, plant hire — come off the total first. Work out your own numbers with the CIS Deduction Calculator.
Registering isn't a one-off task — contractors take on two recurring duties for as long as they're paying subcontractors:
Gross Payment Status (GPS) lets a subcontractor be paid in full, with no CIS deduction at all — tax and NI are then settled the normal way, through Self Assessment or Corporation Tax. HMRC grants it based on a business's turnover, and on passing compliance tests around filing history and past tax payments; the exact turnover and compliance thresholds are set by HMRC and worth checking directly, since they're assessed per business rather than as a single flat figure.
Losing GPS mid-contract is disruptive — payments switch back to 20% or 30% deduction with no notice period for the paying contractor to adjust cash flow around. It's one of the reasons larger subcontractors treat GPS compliance as an ongoing job, not a box ticked once at application.
CIS and VAT are separate systems that frequently apply to the same invoice, and mixing them up is a common source of errors. CIS deductions are calculated on the labour value net of VAT — VAT itself is usually accounted for separately.
For VAT-registered contractors and subcontractors working on standard or reduced-rated construction services reported under CIS, the domestic reverse charge often applies instead of normal VAT: the subcontractor doesn't charge VAT on the invoice at all, and the contractor accounts for it directly to HMRC instead. Getting this wrong in either direction — charging VAT when the reverse charge should apply, or vice versa — is a common inspection flag. Check a specific invoice with the VAT Reverse Charge Checker.
Separately from CIS and VAT, many construction contracts also withhold a percentage of each certified payment as retention — security against defective work — releasing part at practical completion and the rest once the defects liability period ends. Retention is a contractual matter, not a tax one, but it affects the same cash flow CIS and VAT already touch, which is why it's easy to lose track of three different deductions on one invoice. Work out what's withheld and when it's due with the Retention Calculator.
Because CIS is deducted at a flat rate regardless of a subcontractor's actual expenses, personal allowance or overall tax position, most subcontractors have paid in more than they owe by the end of the tax year. That difference comes back as a refund through Self Assessment, once allowable expenses and tax already paid are set against what's actually due. Sole traders can typically claim once the tax year ends; limited companies operating under CIS usually reclaim through their PAYE/CIS account instead, often sooner. Get a rough sense of your position with the CIS Refund Estimator.
Making Tax Digital for Income Tax started bringing CIS subcontractors into digital record-keeping from April 2026, initially for those with qualifying income over £50,000 a year. Rather than one annual Self Assessment return, affected subcontractors keep digital records, submit quarterly updates through compatible software, and file a final year-end declaration. HMRC has signalled the threshold will step down over time, bringing in more subcontractors in later years — worth checking current HMRC guidance if you're near the threshold, since the detail here is still actively changing.
This guide covers how CIS generally works and is not formal tax advice. Rules, thresholds and deadlines are set by HMRC and do change — always confirm the current position against HMRC's CIS guidance or with a qualified accountant before relying on it for a return, invoice or contract decision.