CIS Explained for Subcontractors: How the Construction Industry Scheme Actually Works
If you work as a subcontractor in the building trade, you'll have seen it happen. You invoice a contractor for £2,000 of labour, and £1,600 lands in your account. The other £400 has vanished before you ever touched it.
That's the Construction Industry Scheme doing its job. And while most subcontractors have lived with CIS for years, a surprising number have never had it properly explained — what it actually is, why money's being taken, and whether they're getting back what they're owed at the end of the year.
So let's go through it properly. No jargon, no accountant-speak. Just what CIS is, how the deductions work, and the bits that quietly cost subcontractors money.
What CIS actually is
CIS stands for the Construction Industry Scheme. It's a HMRC system that applies to most construction work in the UK.
The idea is simple enough. When a contractor pays a subcontractor for construction work, the contractor has to take a slice off the payment and send it straight to HMRC. That slice isn't a fee and it isn't lost — it's an advance payment towards the subcontractor's Income Tax and National Insurance for the year.
In other words, HMRC doesn't trust the building trade to all pay their tax bills at the end of the year (and historically, with good reason). So instead of waiting, they collect some of it up front, every time you get paid.
Two important things to be clear on from the start:
CIS only applies to construction work — building, repairs, decorating, demolition, civils, installation of systems like heating and electrics, that sort of thing. And it only applies when one business pays another for that work. If you're an electrician invoicing a homeowner directly for a consumer unit change, CIS doesn't come into it at all. It only kicks in when you're the subcontractor and a contractor is paying you.
So a spark doing a domestic rewire for Mrs Jones at number 14 — no CIS. The same spark doing first fix on a new-build site for a housing developer — CIS all day long.
The deduction rates: 30%, 20% and 0%
This is the part worth understanding properly, because it's where real money is won and lost.
There are three rates a contractor can deduct, and which one applies to you comes down to your status with HMRC.
30% — not registered
If you haven't registered for CIS as a subcontractor, or the contractor can't verify you with HMRC, they must deduct 30% from your labour. It's the penalty rate, designed to make staying unregistered painful.
If you're new to subcontracting and you've not sorted your registration, this is what'll happen — you'll watch nearly a third of your labour disappear off every invoice.
20% — registered
Register as a CIS subcontractor with HMRC and the rate drops to 20%. Registration is free, you do it once, and you'll need your UTR (Unique Taxpayer Reference) — the same number you use for your Self Assessment.
That ten-point drop, from 30% to 20%, is the single easiest bit of money most subcontractors leave on the table. On £40,000 of labour in a year, the difference between the two rates is £4,000 sitting with HMRC instead of in your account. You'll get it reconciled eventually through your tax return, but why hand over more than you need to in the first place?
If you've not registered, that's the job for this week. It's genuinely one phone call or online form.
0% — gross payment status
The third option is gross payment status. Hold this and the contractor deducts nothing — you're paid in full and you settle your own tax and National Insurance at the end of the year, like any other self-employed person.
It's the best position for cash flow, but you have to earn it. To qualify, HMRC looks at three things:
- The turnover test — your net construction turnover (labour, excluding materials and VAT) needs to be at least £30,000 in the 12 months before you apply. For a partnership it's £30,000 per partner; for a company, £30,000 per director, or £100,000 across the business.
- The compliance test — you've paid your own tax and filed your returns on time over the past year.
- The business test — you run the business through a UK bank account and genuinely do construction work.
Gross status is brilliant for cash flow but it puts the discipline back on you. Nobody's holding your tax aside any more, so you have to. If you go gross and spend the lot, the bill at year end is a nasty surprise.
A quick note for 2026: HMRC has tightened the rules around gross payment status. They're now reviewing it more aggressively, and where they can show a business was connected to tax fraud they can cancel gross status on the spot, assess the lost tax and add a 30% penalty. For an honest subcontractor that just means: keep your filings and payments clean and on time, and you've nothing to worry about.
Labour vs materials: the bit that costs people money
Here's the mistake I see most often, and it's an expensive one.
CIS deductions only apply to labour. Materials are excluded. So are VAT, and any plant or equipment you've hired in for the job.
That means if your invoice reads:
Bathroom refit — £3,200
...the contractor may apply the deduction to the whole £3,200, because nothing tells them what was labour and what was materials. At 20%, that's £640 gone.
But if the same invoice reads:
Labour: £2,000 Materials: £1,200 Total: £3,200
...the deduction only applies to the £2,000 of labour. That's £400 — a full £240 less taken off, money that stays in your account instead of sitting with HMRC for a year.
It's the same job, the same total, the same customer. The only difference is that you split it out. Over a year of CIS jobs, lumping labour and materials together can tie up thousands of pounds you didn't need to part with.
So the rule is simple: always itemise labour and materials separately on a CIS invoice. Every time.
Your CIS statement — keep every one
By law, the contractor has to give you a written payment and deduction statement for every payment they make under CIS. They've got to send it within 14 days of the end of the tax month (the CIS tax month runs from the 6th of one month to the 5th of the next).
That statement is your proof. It shows the gross amount, the materials, the labour, and exactly how much was deducted and sent to HMRC in your name.
Hang on to every single one. These are the documents that let you — or your accountant — reconcile what was taken when you do your tax return. Lose them and you're trying to reconstruct a year of deductions from memory and bank statements, which is exactly the kind of January scramble that makes the building trade dread tax season.
Why most subcontractors are owed a refund
This is the part nobody tells new subcontractors, and it's the good news.
Because that 20% comes off your labour before anything else — before your business expenses, before your van costs, before your tools, before your tax-free personal allowance — the amount HMRC collects through CIS across a year is very often more than you actually owe.
When you file your Self Assessment, you declare your total income, deduct your allowable expenses, apply your personal allowance, and work out your real tax bill. Then you set all your CIS deductions against it. If the deductions come to more than the bill — and for a lot of subcontractors they do — HMRC refunds you the difference.
I've seen subcontractors who had no idea this was even a thing, sitting on years of overpaid tax because nobody explained that the CIS deduction is an advance, not a final figure. It's your money. But you only get it back if your records are straight and you actually file.
This is exactly why keeping clean records through the year matters so much — and why I keep banging on about it. If you want the wider picture on records and the new digital rules coming in, I've written about what Making Tax Digital actually means for tradespeople — CIS sits right alongside it.
How to get CIS off your plate
None of this is complicated, exactly. But it's fiddly, it's relentless, and it's the kind of thing that gets done badly at 9pm or not at all. Work out the labour, split off the materials, calculate the deduction at the right rate, log the gross and the net, file the statement, and remember all of it come January.
That's a lot of small, easy-to-skip steps on top of a full day on site. And skipping them is what leaves money with HMRC and turns the tax return into a nightmare.
This is the part of the business I built TradesOffice to take off your hands. You save one WhatsApp contact — Amy — and message her the way you'd message anyone:
"CIS invoice Barratt Homes, £3,500 gross. £2,800 labour, £700 materials."
Amy works out the deduction at your rate, splits the labour from the materials so nothing gets over-deducted, records the gross, the deduction and the net, and produces the invoice. Every CIS job is logged cleanly as it happens. So when year end comes — and your refund's on the line — you, or your accountant, have the full picture in one place instead of a glovebox full of crumpled statements.
It's the same system that gets your invoices out the day the job's done and chases the customers who are slow to pay. No app to learn. No new number. Just the WhatsApp you already use all day, finally pointed at the admin.
Frequently asked questions
Do I have to register for CIS as a subcontractor?
You don't have to — but if you don't, contractors must deduct 30% from your labour instead of 20%. Registering is free, takes one form, and you'll need your UTR. For the sake of a few minutes it saves you a third of your labour going to HMRC up front, so for almost everyone the answer is yes, register.
Does CIS apply if I only work for homeowners?
No. CIS only applies when a contractor pays a subcontractor for construction work. If all your work is invoicing private homeowners directly, you're outside the scheme. The moment you start subcontracting to a builder, developer or larger firm, CIS kicks in on those payments.
Is CIS the same as being employed?
No, and it's an important difference. Under CIS you're still self-employed — you run your own business, claim your own expenses, and file your own Self Assessment. The contractor just deducts tax in advance on HMRC's behalf. You don't get holiday pay, sick pay or employee rights, and you're responsible for your own National Insurance.
How do I claim my CIS deductions back?
Through your Self Assessment tax return. You report your total income and expenses to work out your actual tax bill, then enter the total CIS deductions taken during the year. If the deductions are more than you owe, HMRC refunds the difference, usually within a few weeks of filing. Your CIS payment and deduction statements are your evidence, so keep them all.
What's the difference between gross payment status and the 20% rate?
On the 20% rate, the contractor takes 20% off your labour and sends it to HMRC before paying you. With gross payment status, they pay you the full amount and you settle all your tax yourself at year end. Gross status is much better for cash flow but you have to qualify (a £30,000 turnover test, a clean compliance record and a UK bank account) and you have to be disciplined about setting your own tax aside.
CIS isn't going anywhere, and for most subcontractors it's a fact of working life rather than a problem to solve. But getting the small things right — registering, splitting labour from materials, keeping every statement, and actually filing — is the difference between a tidy refund and money quietly lost to HMRC.
If you'd rather not think about any of it, that's the whole idea behind Amy. Save one contact, message her after the job, and let the CIS admin sort itself out in the background.
Amy starts work the moment you save her number.
No app. No new number. Register in 60 seconds and send your first message tonight.
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