How to set up CIS correctly as a subcontractor or contractor

The Construction Industry Scheme is HMRC's way of collecting tax from the construction supply chain as work happens, rather than waiting until the end of the year. If you're a contractor, you deduct money from what you pay your subcontractors and send it to HMRC as an advance payment towards that subcontractor's tax and National Insurance. If you're a subcontractor, that deduction gets set against your eventual tax bill. Get the mechanics right and it's just admin. Get them wrong and you're either underpaying HMRC (their problem becomes your problem, with penalties) or overpaying and tying up cash you didn't need to.

This is a general guide, not tax advice for your specific situation - always confirm the detail with HMRC or your accountant, especially anything involving gross payment status, subcontractors who are also employees, or work that falls outside CIS entirely (some professional services, and some supply-only arrangements, aren't covered).

Step 1: Work out whether you're a contractor, a subcontractor, or both

Under CIS, a contractor is any business that pays subcontractors for construction work - this includes mainstream builders and fit-out firms, but also businesses that aren't in construction themselves but spend over a certain amount a year on construction operations (HMRC calls these "deemed contractors"). A subcontractor is anyone doing construction work for a contractor, whether that's a sole trader, a partnership, or a limited company.

Plenty of businesses are both - you might take on subcontractors for a big fit-out job while also working as a subcontractor to a main contractor on someone else's site. If that's you, you need to register for both roles and run both sides of the process correctly. Don't assume being registered as a subcontractor automatically covers you as a contractor, or vice versa - they're separate registrations with separate obligations.

Step 2: Register with HMRC

Contractors must register for CIS before taking on their first subcontractor. Subcontractors should register too - you don't legally have to, but if you don't, contractors are required to deduct 30% instead of 20% from your payments, which is a real dent in your cash flow for no good reason. Registration is done through your HMRC online account (Government Gateway), and it's worth doing well before you need it - leaving it until the week you're due your first payment just delays the money.

If you're a subcontractor with a solid track record - turnover, tax compliance history and business tests all need to stack up - you can apply for gross payment status, meaning contractors pay you in full with no deduction at all, and you deal with your tax through Self Assessment or Corporation Tax as normal. It's worth applying for once your business is established, but HMRC will check your compliance going forward, so don't apply if your filing history isn't clean.

Step 3: Verify every subcontractor before you pay them

As a contractor, before you pay a subcontractor for the first time (or if you haven't paid them in the current or previous two tax years), you must verify them with HMRC. This is a quick check, done online or through your CIS software, that confirms whether they're registered and tells you the correct deduction rate to apply - 20%, 30%, or 0% for gross payment status. Skipping verification and guessing the rate is one of the most common ways contractors end up with HMRC queries down the line, because it puts the liability for getting it wrong back on you.

Step 4: Deduct the right rate - on the right amount

This is where people genuinely lose money, in both directions. CIS deductions apply only to the labour element of a payment. Materials the subcontractor has genuinely bought in for the job, VAT, and plant hire (where it's a separate, identifiable charge) are excluded from the deduction - you don't take 20% off the whole invoice, just the labour portion.

In practice this means every subcontractor invoice needs materials and labour broken out clearly. If a subcontractor lumps everything into one figure, ask them to split it - it's in both your interests, since deducting CIS from materials costs is an easy way to underpay a subcontractor and start a dispute. The rates themselves:

• 20% - subcontractor is registered and verified under CIS
• 30% - subcontractor isn't registered, or can't be verified
• 0% - subcontractor holds gross payment status

Step 5: File monthly and issue statements

Contractors must submit a CIS return to HMRC every month, even in months where you haven't paid any subcontractors (you can file a nil return, or tell HMRC in advance you expect a quiet period). The return is due by the 19th of the month following the tax month it covers. Late or incorrect returns attract automatic penalties that escalate the longer they go unfixed, so this isn't one to let slide.

You must also give each subcontractor a payment and deduction statement within 14 days of the end of each tax month you've paid them, showing the gross amount, the deduction, and the net payment. They need this for their own records and to support their tax return, so treat it as a normal part of paying them - not an optional extra. Job management software that tracks jobs, invoicing and payments in one place (see /features/) makes this easier to stay on top of than chasing figures across spreadsheets and email, particularly once you've got more than a handful of subcontractors on the books.

How a subcontractor reclaims CIS deductions

The deductions taken from you aren't lost - they're credited against what you owe HMRC. How you reclaim depends on your structure:

• Sole traders and partnerships reclaim through Self Assessment - the CIS deductions you've had taken over the tax year are set against your income tax and Class 4 National Insurance bill, with any excess refunded.
• Limited companies set CIS deductions off against PAYE and National Insurance owed on their monthly payroll submissions (via the Employer Payment Summary), or against Corporation Tax. If deductions exceed what's owed, the company can claim a refund from HMRC at year end.

Keep every payment and deduction statement you're given - you'll need them to prove what's already been deducted, and reconstructing them after the fact from a contractor who's since gone quiet is a genuine headache.

The VAT domestic reverse charge - related, but a separate rule

If you're VAT-registered and working B2B on CIS-covered construction services, the domestic reverse charge (in force since 1 March 2021) usually applies as well. Instead of the subcontractor charging VAT and the contractor paying it, the customer accounts for the VAT themselves on their own VAT return, and the subcontractor's invoice states that the reverse charge applies rather than adding VAT on top. It only applies between VAT-registered businesses within the CIS chain, and it doesn't apply to the end customer (e.g. the property owner) or to zero-rated supplies. Get this wrong and you'll either overcharge VAT you shouldn't have, or fail to account for VAT you should have - both create problems at your VAT return. If you're not confident which invoices should carry the reverse charge, check with your accountant before you send them out.

Common mistakes that cost people money

• Deducting CIS from materials as well as labour - always split the invoice.
• Not verifying a subcontractor and guessing 20% when 30% was actually due, leaving the contractor short when HMRC reconciles it.
• Missing the monthly return deadline - even by a day triggers a penalty, and repeated lateness compounds them.
• Not issuing payment and deduction statements, which leaves subcontractors unable to prove their reclaim and generates a stream of chasing emails.
• Forgetting you're a "deemed contractor" because your core business isn't construction, but your spend on it crosses HMRC's threshold.
• Mixing up CIS and the VAT reverse charge - they interact but are governed by different rules and reported differently.

Keep good records

Whatever system you use - spreadsheets, accounting software, or job management software that keeps invoices, verification status and deduction statements attached to the job they relate to (worth comparing options; see /pricing/ if you're weighing up tools) - the discipline that actually protects you is the same: verify before you pay, split labour from materials on every invoice, file on time every month, and keep every statement you issue or receive. HMRC can and does check CIS records, and the businesses that sail through are the ones who never had to reconstruct anything after the fact.