Construction Industry Scheme Payroll

You have agreed a price with a subcontractor, the work is done, and the invoice is on your desk.

Before you transfer the full amount, your finance manager asks: are we supposed to deduct CIS? If you are not sure, you are not alone.

The Construction Industry Scheme catches out businesses at every size and stage, because the rules cut across payroll and tax obligations in ways that are easy to miss.

This guide covers who CIS applies to, how verification works, what the three deduction rates mean, and what your monthly filing obligations look like.

We also cover the boundary between CIS and PAYE, which is where most of the practical confusion sits.

What is the Construction Industry Scheme?

CIS is a HMRC mechanism that requires contractors to deduct money from payments to subcontractors and pass it directly to HMRC.

Those deductions count as advance payments against the subcontractor’s tax and National Insurance liability for the year.

The scheme exists because construction work is fragmented. Labour moves between sites, companies form and dissolve quickly, and the risk of unpaid tax is structurally high.

CIS is HMRC’s answer: collect at source rather than rely on self-assessment returns that may never arrive.

The scheme covers construction operations in the UK: site preparation, demolition, alterations, repairs, decorating, installation of systems such as heating and ventilation, and post-construction cleaning.

It does not cover architecture, surveying, or professional services that are purely advisory.

Who counts as a contractor under CIS?

You are a contractor under CIS if you pay subcontractors to carry out construction work. This applies regardless of whether you consider yourself a construction business.

A property developer who hires builders, a local authority commissioning road repairs, or a retailer fitting out a new store is a contractor for those payments.

There is a second route into contractor status that catches businesses off guard. If your organisation is not primarily in construction but your annual spend on construction operations exceeds £3 million, averaged over the previous three years, you become what HMRC calls a deemed contractor.

At that threshold, you must register with CIS, verify your subcontractors, and operate the scheme in full.

We see this most often in large retail and property groups whose facilities budgets breach the threshold without anyone in finance connecting the spend to a CIS registration requirement.

Who counts as a subcontractor under CIS?

A subcontractor is any business or individual paid by a contractor to carry out construction work. That includes sole traders, partnerships, and limited companies.

VAT registration and limited company status do not exempt a subcontractor from CIS.

Employment status is a separate question. CIS applies only to subcontractors, not employees. If the person doing the work is genuinely employed by you, CIS does not apply, but PAYE does.

We address that boundary in the PAYE section below.

A subcontractor can also be a contractor simultaneously. If your firm takes on work from a main contractor, you are a subcontractor in that relationship. If you then engage other firms to help deliver it, you are a contractor in relation to those firms.

CIS operates at every level of the supply chain. If your firm sits in the middle of one, you are running two sets of CIS obligations at once, as a subcontractor and as a contractor, which means two sets of verification checks and return deadlines to track.

How does the verification process work?

Before you pay a new subcontractor, you must verify them with HMRC. This is mandatory, not advisory. Verification determines which deduction rate applies.

If you pay without verifying and HMRC later finds the subcontractor was unregistered, you may be liable for the shortfall.

To verify, contact HMRC by phone on 0300 200 3210, through the HMRC online service, or via CIS-enabled payroll software. You will need the subcontractor’s name, their UTR (Unique Taxpayer Reference), and, for companies, their company registration number.

HMRC returns a verification result that tells you which rate to apply.

You do not need to re-verify a subcontractor every time you pay them.

But you must refresh the verification if you have not paid them in the current or previous tax year, or if you have reason to believe their status has changed.

What are the three CIS deduction rates?

The rate that applies depends entirely on the subcontractor’s registration status at the point of verification.

0% (gross payment status): No deduction is made. The subcontractor receives the full payment and settles their own tax through self-assessment.

Gross status must be applied for and is not automatic.

HMRC grants it to subcontractors with a good compliance record who meet turnover thresholds: £30,000 net construction turnover for a sole trader, or £30,000 per director up to £100,000 total for a company.

20% (standard rate): Applied to subcontractors registered under CIS but without gross payment status. You deduct 20% of the labour element of the invoice and pay it to HMRC.

Materials are excluded from the calculation.

30% (unregistered rate): Applied when HMRC cannot match the subcontractor’s details during verification.

This rate causes significant cash flow problems for the subcontractor and creates compliance risk for you if the return is not filed correctly.

The deduction applies only to the labour element. If a subcontractor invoices £10,000 for labour and £3,000 for materials, the 20% deduction applies to £10,000 only.

The subcontractor receives £8,000 for labour plus the full £3,000 for materials, and you remit £2,000 to HMRC. Getting the split wrong is the most common source of CIS calculation errors.

When is the monthly CIS return due?

Every contractor must file a monthly CIS return (form CIS300) covering all payments to subcontractors in that tax month. A CIS tax month runs from the 6th to the 5th of the following month. The return is due by the 19th of the month after the tax month ends.

If you pay online, the deadline extends to the 22nd.

Penalties escalate quickly. A return filed one day late attracts a £100 penalty. At two months outstanding, the penalty rises to £200.

After six months, an additional charge of £300 or 5% of the CIS liability applies, whichever is higher. At 12 months, a further £300 or 5% penalty is added.

The total can reach £3,000 on a single return for significant and prolonged delays.

If you made no payments to subcontractors in a given month, you must still file a nil return unless you have notified HMRC that your scheme is temporarily inactive.

Missing nil returns is a frequent and unnecessary source of penalties.

How does CIS interact with PAYE?

This is where we see the most persistent confusion in practice. CIS and PAYE are different obligations, but they land in the same monthly payment to HMRC.

CIS deductions are not payroll costs. They are tax collected on behalf of subcontractors, held temporarily as a creditor on your balance sheet, and remitted to HMRC alongside your PAYE liabilities using the same employer payment reference.

HMRC does not issue separate demands; you must calculate and pay the combined total correctly each month.

The deeper risk is employment status. If you engage a worker under CIS as a self-employed subcontractor, and HMRC later reclassifies that worker as an employee, the PAYE liability falls on you.

That includes arrears of employer National Insurance. Operating CIS does not constitute evidence that a worker is genuinely self-employed.

HMRC assesses employment status independently, and we have seen contractors exposed to significant back-tax bills after assuming CIS registration settled the question.

How does a subcontractor reclaim CIS deductions?

From the subcontractor’s side, CIS deductions are advance payments toward their annual tax liability. At year end, they offset total deductions against their income tax and NI bill through self-assessment.

If deductions exceed the final liability, HMRC refunds the difference.

For subcontractors operating through limited companies, deductions can be offset against PAYE liabilities in-year, which improves cash flow significantly. Your obligation as the contractor is to issue monthly deduction statements showing the gross payment, the deduction amount, and the net paid.

Without these statements, subcontractors cannot reconcile their own records, and HMRC may disallow the credit.

Frequently asked questions about CIS

What should you do before your next subcontractor payment?

If you are paying subcontractors for construction work and have not yet registered as a CIS contractor, registration is the first action. Do it before you make the next payment.

If you are already operating CIS manually, review whether your UK payroll software includes a CIS module.

The monthly return deadline and the labour-materials split are where errors concentrate, and both are straightforward to automate.