Most trade businesses meet the Construction Industry Scheme as a number missing from a payment. Twenty per cent has gone, nobody explained why, and the statement that should have arrived with it did not. What almost nobody is told is that the same business is usually a contractor as well — with its own duties to verify, deduct, return and pay over on the labour it engages. This guide covers both directions of the same contract.
Guide · Updated August 2026
The scheme puts a business in one of two positions on any given payment, and a working trade business is usually in both at the same time. On money coming in from a main contractor it is a subcontractor, and it suffers a deduction. On money going out to the labour it engages, it is a contractor, and it has to verify each of those people with HMRC, deduct at the right rate, file a monthly return and pay the money over.
The legal definitions come from Finance Act 2004 section 59. A mainstream contractor is any person carrying on a business that includes construction operations, and HMRC's own guide CIS 340 is explicit that this captures property developers, speculative builders, gang leaders who organise construction labour, and foreign businesses carrying out UK construction work. A subcontractor is any person or body that has agreed to carry out construction operations for a contractor — companies, self-employed individuals, labour agencies and gang leaders alike.
There is a third category that catches businesses with no connection to building at all. A deemed contractor is a business that is not itself in construction but spends more than £3,000,000 on construction operations in the period of one year ending with that moment. It is a rolling twelve-month test, not an annual average, and it has applied in that form since 6 April 2021. A retailer refitting a chain of shops crosses it without ever thinking of itself as a builder.
Being a subcontractor does not excuse you from being a contractor. A groundworker invoicing a housebuilder and paying three self-employed labourers has both sets of duties running simultaneously: deductions suffered on money in, and verification, returns and payments on money out. See CIS for subcontractors and CIS for contractors for each side in detail.
| Status of the subcontractor | Deducted from the labour element |
|---|---|
| Gross payment status | Nothing — no deduction is made |
| Registered for CIS, paid under deduction | 20% (standard rate) |
| Not registered, or cannot be verified | 30% (higher rate) |
CIS 340 is precise about this and it is worth borrowing the precision: there are two rates of deduction. Gross payment status is the absence of a deduction, not a third rate. That distinction matters when you read the legislation, because the rules on removing gross payment status are rules about removing an exemption, not about changing a percentage.
The gap between 20% and 30% is the cheapest money in the sector. It costs nothing but a registration to close, and it is pure cash flow: ten points of every labour invoice, sitting with HMRC until after the tax year ends. If you are being paid at 30%, that is the first thing to fix this week, before anything else in this guide.
Scope comes from FA 2004 section 74(2), and it is much wider than "building houses". It covers construction, alteration, repair, extension, demolition or dismantling of buildings or structures whether permanent or not. It covers works to the land: roads, power lines, telecommunications apparatus, runways, docks, railways, pipelines, reservoirs, water mains, sewers and land drainage. It covers the installation in any building of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection — which is how nearly every electrician, plumber and gas engineer working on sites ends up inside the scheme. It covers painting and decorating internal or external surfaces. And it covers operations integral or preparatory to all of that: site clearance, earth-moving, excavation, foundations, scaffolding, site restoration, landscaping and access works.
Section 74(3) takes things out again, and the exclusions are where the surprises live:
CIS 340 additionally treats as outside the scheme running a canteen or site hostel, medical, safety or security services, and routine cleaning of existing commercial or industrial premises — though internal cleaning during construction, alteration, repair or restoration is inside it. A fabricator who makes a steel frame in a workshop and delivers it is outside the scheme on the manufacture and delivery; the same business erecting that frame on site is inside it. The invoice often needs splitting, and the split has to be honest.
The deduction is never taken from the whole invoice. HMRC's formulation is that deductions must only be made from the part of the payment that does not represent the cost of materials incurred by the subcontractor. Out of the deduction base come the direct cost of materials, consumable stores, fuel (except fuel for travelling), plant hire, the cost of manufacture or prefabrication, and the VAT the subcontractor charges.
Two traps sit inside that list, and both cost real money.
The first is the word incurred. The subcontractor must have directly incurred the cost. If the contractor buys the materials, or reimburses the subcontractor for them, the subcontractor has not directly incurred them and no reduction is due — HMRC's manual at CISR15060 is clear on it. Materials on the contractor's account do not shelter anything.
The second is what stays in. Travel and subsistence are subject to deduction. Mileage, fuel for getting to site, hotels and food on a job away from home are all part of the payment the deduction is taken from. Presenting them as an expense recharge on the invoice does not change it, and this is one of the most common and most expensive errors we see on trade invoices.
A subcontractor invoices £10,000 to a main contractor and is registered at the standard rate.
Add £400 of travel and subsistence to the first version and the deduction rises to £2,080 — travel is inside the base. Run your own numbers in the CIS deduction calculator.
Where a materials figure looks overstated, HMRC's instruction to the contractor is to ask for satisfactory cost information and, if it is withheld or looks inflated, to make a reasonable estimate. The contractor carries the responsibility for the materials figure being reasonable — which is why a contractor who accepts a vague "materials £4,000" line on a subcontractor invoice is taking on somebody else's risk.
A contractor must verify a subcontractor with HMRC before the first payment. There is one exception worth knowing because it saves work: no verification is needed if you last included that subcontractor on a return in the current tax year or either of the two preceding ones. Regulars do not need re-verifying every job.
HMRC issues a single verification reference for a batch. Where a subcontractor cannot be verified, the same number comes back with a unique letter suffix. CIS 340 puts it plainly: it is essential that the contractor shows the verification reference number, complete with any letters on the end, on the payment and deduction statement in every case where the higher rate has been applied. That letter is the audit trail for why 30% was taken, and without it a higher-rate deduction looks arbitrary.
The tax month runs from the 6th of one month to the 5th of the next, and almost everything is due within fourteen days of the end of it.
| Obligation | Deadline |
|---|---|
| Monthly CIS return | By the 19th |
| Nil return, or notification of inactivity | By the 19th |
| Payment and deduction statement to each subcontractor | By the 19th |
| Pay the deductions to HMRC — electronically | By the 22nd |
| Pay the deductions to HMRC — by post | By the 19th |
| Retain CIS records | 3 years after the end of the tax year |
The nil return obligation is a live change worth flagging. It had been removed in 2015; from 6 April 2026 it is reinstated for mainstream contractors, so a month in which you paid no subcontractors still needs either a nil return or a notification of inactivity by the 19th. Deemed contractors are not legally required to file nil, but if they neither file nor notify, HMRC will issue a penalty and cancel it only once the deemed contractor confirms nobody was paid. The full list of dates is on the CIS tax calendar.
The payment and deduction statement has to show the contractor's name and employer tax reference, the end date of the tax month, the subcontractor's name and UTR, the verification number where the subcontractor could not be verified, the gross amount paid, the materials cost that reduced the deduction, and the deduction itself. No statement is required where payment is made gross, though CIS 340 calls issuing one anyway good practice — and for a subcontractor trying to reconcile a year, it is more than that.
| How late | Penalty |
|---|---|
| 1 day | £100 |
| 2 months | £200 |
| 6 months | £300, or 5% of the CIS deductions on the return — whichever is higher |
| 12 months | A further £300 or 5%, whichever is higher |
| Over 12 months, most serious cases | Up to £3,000 or 100% of the deductions, whichever is higher |
These stack per return, so a contractor who has missed six months has six sets running, not one. The appeal window is 30 days from the penalty notice. And because the penalties are per return rather than per amount, a run of nil months left unfiled produces a bill out of all proportion to the tax involved — which is exactly why the reinstated nil return obligation matters from April 2026.
How you recover what has been deducted depends entirely on your structure, and the difference is worth thousands in working capital.
A sole trader or partnership reports CIS payments and deductions on the self-employment supplementary pages, or the partnership return. CIS 340 is emphatic that they must never go on the employment pages — they are not employment income. The deductions are advance payments of income tax and Class 4 NIC, set against the Self Assessment liability with any excess repaid. The structural problem is timing: they are suffered continuously through the year and recovered only after it ends.
A company cannot claim CIS deductions on its corporation tax return at all. It offsets them in-year, monthly, through the RTI employer payment summary, against PAYE tax due, NIC due, student loan repayments due, and the CIS it has deducted from its own subcontractors. Any excess at the end of the tax year can then be refunded or set against corporation tax. CIS 340: no repayments or set-offs against other liabilities can be made in-year except in liquidation or administration.
The consequence is the biggest avoidable cash problem in the sector. A labour-only limited company with a small payroll systematically accumulates more CIS suffered than it has PAYE to absorb, so the money is locked up until after 5 April. The fix is gross payment status, and the turnover bar is lower than most people assume.
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If your business carries out construction operations you are a subcontractor on the payments you receive from a main contractor, and you suffer a deduction on them. If you pay anyone else to carry out construction operations for you, you are simultaneously a contractor on those payments, and you must verify them with HMRC, deduct at the right rate, file a monthly return by the 19th and pay the money over by the 22nd. Most working trade businesses with any labour under them are both at once, and both sets of duties run in parallel. There is also a third category: a business outside construction becomes a deemed contractor if it spends more than £3 million on construction operations in any rolling twelve months.
The higher rate of 30% applies where the subcontractor is not registered for the scheme, or where the contractor asked HMRC to verify them and HMRC could not. Registering for CIS moves you to the standard 20% rate, and it is the single cheapest cash-flow improvement available to a trade business, because those ten percentage points are your money sitting with HMRC until after the tax year ends. If you believe you are registered and are still being paid at 30%, ask the contractor for the verification reference on your payment and deduction statement — where verification failed, HMRC issues the batch number with a unique letter suffix, and that suffix is the evidence of what actually happened.
Yes, but only materials whose cost you directly incurred. Out of the deduction base come the direct cost of materials, consumable stores, fuel other than fuel for travelling, plant hire, the cost of manufacture or prefabrication, and the VAT you charge. If the contractor buys the materials, or reimburses you for them, you have not directly incurred the cost and no reduction is due. Keep the purchase invoices, because HMRC's instruction to the contractor is to ask for satisfactory cost information and to make a reasonable estimate if it is withheld or looks inflated. On a £10,000 invoice, £3,000 of properly evidenced own-bought materials cuts the deduction from £2,000 to £1,400.
No, and this is one of the most expensive misunderstandings in the trades. Travelling expenses and subsistence are included in the payment the deduction is taken from. Fuel is excluded from the deduction base except fuel for travelling, which means the diesel that gets the van to site stays in. Showing mileage, hotels or food as a separate expense recharge line on your invoice does not change the treatment. So a £10,000 labour invoice with £400 of travel recharged suffers a deduction on the full £10,400 of labour and travel, not on £10,000, and the deduction is £2,080 rather than £2,000.
Penalties start at £100 one day late, rise to £200 at two months, then £300 or 5% of the deductions on that return at six months, whichever is higher, with a further £300 or 5% at twelve months. In the most serious cases beyond twelve months it can reach £3,000 or 100% of the deductions. They apply per return, so several missed months produce several penalties. From 6 April 2026 the nil return obligation is reinstated for mainstream contractors, so a month in which you paid nobody still needs a nil return or a notification of inactivity by the 19th. You have 30 days from a penalty notice to appeal.
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