United Kingdom construction tax

What is the Construction Industry Scheme (CIS) in the United Kingdom?

The Construction Industry Scheme (CIS) is a set of HMRC rules that usually requires contractors who pay subcontractors for construction operations to register for CIS, verify each subcontractor when the rules say you must, then withhold tax on account from the payment except for amounts that represent the subcontractor's own materials, VAT, and other costs CIS 340 treats as excluded (HM Revenue and Customs, Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340), accessed 2026).

HMRC uses verification to tell a contractor whether to pay gross, apply the standard deduction rate to the labour element, or apply the higher deduction rate when a subcontractor cannot be matched to CIS registration in the way GOV.UK describes (HM Revenue and Customs, CIS 340, section 3.1, accessed 2026). CIS 340 includes examples that assume a twenty percent deduction rate on the amount liable to deduction; GOV.UK publishes the current standard and higher percentages contractors must use after verification under "Make deductions and pay subcontractors" (GOV.UK, accessed 2026).

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Contractors pay withheld amounts to HMRC, file CIS300 returns for each tax month, and give subcontractors written statements when deductions apply. Subcontractors with gross payment status can be paid without those deductions when HMRC has approved gross payment (HM Revenue and Customs, CIS 340, accessed 2026).

CIS is separate from VAT. A VAT-registered business still follows VAT invoice rules for taxable supplies while CIS only changes how much cash moves after labour is priced (HM Revenue and Customs, CIS 340, section 2.17, accessed 2026).

This page summarises public HMRC and GOV.UK guidance. It is not tax or legal advice. Confirm your facts with HMRC or a United Kingdom tax adviser.

Quick reference

CIS, contractors, and what invoices should show

Use these definitions with your quantity surveyor, contracts manager, or accountant so applications for payment and sales invoices tell one story.

What is CIS in the United Kingdom?

CIS is the HMRC regime that governs how most contractors handle payments to subcontractors for construction operations. CIS 340 explains that all payments from contractors to subcontractors must take account of the subcontractor's tax status as determined by HMRC, which may require the contractor to make a deduction paid to HMRC from the part of the payment that does not represent the cost of materials incurred by the subcontractor (HM Revenue and Customs, CIS 340, section 1, accessed 2026).

  • Applies to contractors paying subcontractors for construction operations within the statutory definition
  • Uses verification so HMRC sets standard rate, higher rate, or gross payment outcomes
  • Deductions are calculated from amounts after legitimate exclusions such as materials and VAT
  • Runs alongside PAYE for employees and VAT for taxable supplies

Example

A main contractor pays a brickwork firm three thousand pounds for labour and five hundred pounds for materials the subcontractor bought. CIS logic focuses on the labour element; materials the subcontractor incurred follow the exclusion rules in CIS 340 rather than being merged into one blended line without evidence.

Who is a CIS contractor?

A contractor is a business or other concern that carries out construction operations or spends more than a set amount on construction operations in a rolling twelve-month period, and pays subcontractors for construction work. Subcontractors are businesses or people paid by the contractor under a construction contract. CIS 340 walks through exceptions such as payments to employees taxed through PAYE (HM Revenue and Customs, CIS 340, chapter 2, accessed 2026).

  • Contractors must register for CIS before paying the first subcontractor
  • Deemed contractor rules can pull non-construction businesses into CIS when spend thresholds are met
  • Subcontractors register so payers apply the standard rate instead of the higher rate where rules allow
  • Gang leaders can stand between contractors and workers with specific CIS duties described in CIS 340

Example

A regional fit-out company engages joinery and electrical subcontractors. It registers as a CIS contractor, verifies each firm before the first payment when required, and applies the deduction rate HMRC confirms.

What happens before money leaves the bank?

Verification is HMRC's process to ensure the correct deduction rate applies. CIS 340 describes three steps: the contractor contacts HMRC with subcontractor details, HMRC checks registration, then HMRC tells the contractor what rate to apply, if any (HM Revenue and Customs, CIS 340, section 3.1, accessed 2026). When a contractor deducts, CIS 340 requires a written payment and deduction statement within fourteen days of the end of each tax month, noting that a tax month runs from the sixth of one month to the fifth of the next (HM Revenue and Customs, CIS 340, section 3.17, accessed 2026).

  • Re-verification is needed when subcontractors drop off recent returns, which ICAEW reported HMRC emphasised in 2024
  • Statements must match the figures you later show on CIS300
  • Poor descriptions on invoices force guesswork on materials versus labour
  • Statements support the subcontractor's Self Assessment or company set-off

Example

You verify a new electrician online, receive a standard rate instruction, deduct from the labour portion of the application for payment, pay HMRC the withheld amount, and email the subcontractor their statement before the nineteenth of the month.

Side-by-side

CIS vs PAYE vs United Kingdom VAT

CIS withholds tax on account from many subcontractor payments. PAYE withholds from employees through payroll. VAT is a separate consumption tax with its own invoice rules when you are VAT registered.

Who it mainly affects

CISContractors paying subcontractors for construction operations, plus subcontractors registering for gross or net payment
PAYEEmployers paying staff under a contract of employment
United Kingdom VATVAT-registered businesses making taxable supplies

What triggers registration

CISContractor duties begin before paying the first subcontractor; subcontractors register to improve deduction outcomes
PAYEYou employ someone and pay them as an employee
United Kingdom VATTaxable turnover crosses GOV.UK thresholds or you choose voluntary registration

Typical invoice or payroll focus

CISSplit labour, materials, plant, and VAT so exclusions are evidenced
PAYEPayslips, RTI, and pension contributions rather than sales invoices
United Kingdom VATVAT lines, registration number, and tax points on VAT invoices

How often HMRC expects returns

CISMonthly CIS300 returns with payments of deductions, plus statements to subcontractors
PAYERTI each pay period through payroll software
United Kingdom VATVAT Returns on HMRC-assigned periods, often quarterly, with Making Tax Digital rules for many businesses

Practical guidance

When CIS rules shape your paperwork

You are in CIS territory when you pay subcontractors for construction operations, receive applications for payment that mix labour and materials, or file CIS300 returns after withholding tax.

Paying construction subcontractors

Contractors register for CIS, verify subcontractors when CIS 340 demands it, calculate deductions from the payment after exclusions, pay HMRC, and file CIS300 returns each tax month (HM Revenue and Customs, What you must do as a CIS contractor: Overview, accessed 2026).

  • You engage a groundworks firm on a fixed price that includes plant hire recharges
  • You pay a labour-only brickwork gang through an intermediary
  • You make a payment after materials and labour were priced on one schedule of rates
  • You operate as a deemed contractor because construction spend crossed statutory tests

Show materials and labour on separate lines or supporting breakdowns so your own QS team and the payer agree the CIS base.

Registering as a subcontractor

Subcontractors register with HMRC for CIS so contractors receive a standard deduction rate instead of the higher rate when verification succeeds, and can apply for gross payment status when turnover and compliance tests are met (GOV.UK, What you must do as a CIS subcontractor, accessed 2026).

  • You move from employee to limited company subcontractor
  • You want gross payment to protect cash flow while you meet compliance tests
  • A new main contractor asks for your Unique Taxpayer Reference before the first valuation
  • You need to reconcile deductions against your corporation tax or Self Assessment

Keep Unique Taxpayer Reference and company details aligned with HMRC records so verification is instant rather than delayed.

VAT-registered construction supplies

VAT follows VAT Notice 700 and related guidance. CIS 340 states that the deduction does not apply to any part of a payment that is for the cost of materials or VAT, so your invoice still shows VAT when the supply is taxable (HM Revenue and Customs, CIS 340, section 2.17, accessed 2026).

  • You supply standard-rated services to another VAT-registered business
  • Domestic reverse charge applies and your invoice carries the required wording
  • You zero-rate an export of services with evidence
  • You issue credit notes that adjust both VAT and CIS-related cash

Train site teams to avoid describing everything as "works" when part of the sum is clearly merchant materials.

What sets them apart

CIS paperwork compared with a plain sales invoice

A CIS-ready invoice still needs customer identity and VAT lines when you are VAT registered, but it also makes the labour and materials split obvious so the contractor can apply exclusions honestly.

CIS statement versus sales invoice

Your sales invoice requests payment for the supply. The contractor's payment and deduction statement proves what they withheld under CIS 340 and must reach the subcontractor within the published time limit.

Application for payment versus tax point

Applications for payment drive construction cash flow. VAT tax points still follow VAT law, so the date you must account for VAT may not match the day CIS cash leaves the contractor.

Materials mark-up versus pure recharges

CIS 340 expects contractors to exclude materials the subcontractor actually incurred. Indistinct mark-ups can be challenged, so show supplier invoices or agreed schedule rates.

CIS versus Construction Industry Training Board levy

CITB levy is a separate industrial training charge for employers who register within its scope. It does not replace CIS registration or CIS300 filing.

Workflow

How contractors keep CIS aligned with site payments

Register, verify, price labour and materials distinctly, deduct, pay HMRC, file CIS300, issue statements, then reconcile subcontractor queries before the next valuation.

  1. 1

    Register and gather subcontractor identifiers

    Complete contractor registration on GOV.UK before paying anyone who meets the subcontractor definition. Collect Unique Taxpayer Reference, company number, and trading name as shown on HMRC records.

    Tip: Store verification printouts in the same folder as the subcontract order so audits trace from contract to CIS return.

  2. 2

    Verify or re-verify before paying

    Use HMRC online services when CIS 340 requires verification, including new engagements and cases where the subcontractor has not appeared on recent returns (ICAEW Insights, Contractors reminded to verify subcontractors, 5 August 2024).

    Tip: Calendar a quarterly check for dormant subcontractors who reappear on new phases.

  3. 3

    Agree the split between labour, materials, and VAT

    Align applications for payment with CIS exclusions. Keep VAT outside the CIS deduction base and document materials with invoices or agreed recharges.

    Tip: Use the same description language on your invoice, remittance advice, and statement.

  4. 4

    Calculate deductions and pay subcontractors

    Apply the HMRC rate to the amount liable to deduction after exclusions. Pay the net amount to the subcontractor and retain the withheld portion for HMRC.

    Tip: If a valuation is reduced for defects, adjust both gross and CIS base together.

  5. 5

    Pay HMRC and file CIS300

    Send deductions to HMRC on schedule and complete the CIS300 for each tax month, including nil returns when legislation requires them from 6 April 2026 for mainstream contractors who paid no subcontractors (HM Revenue and Customs, CIS 340, section 4, accessed 2026).

    Tip: Match bank references to the correct tax month to avoid misallocated payments.

  6. 6

    Issue statements and close the loop

    Provide payment and deduction statements within fourteen days of the month end and respond when subcontractors query figures before their Self Assessment deadline.

    Tip: Archive statements for at least six years unless HMRC specifies longer for your case.

Pitfalls

Mistakes that trigger CIS penalties or slow payment

Typical errors include skipping verification, deducting from materials without evidence, missing CIS300 deadlines, and confusing CIS with VAT reverse charge wording.

Treating every worker as a subcontractor

Problem

You pay labour-only staff without operating PAYE because they invoice through a personal service company.

Fix

Apply employment status and agency rules in CIS 340 chapters 2 and 4 before you pick CIS over PAYE.

Blending labour and merchant materials

Problem

You deduct from the full application even when the subcontractor attached supplier invoices for materials.

Fix

Agree an explicit materials schedule and keep third-party invoices on file.

Forgetting re-verification

Problem

You reuse a three-year-old verification while HMRC expects a fresh check after gaps on returns.

Fix

Track last inclusion on CIS300 and rerun verification when CIS 340 or HMRC prompts apply.

Missing nil returns after April 2026

Problem

You stop filing in months with no subcontractors once projects pause.

Fix

From 6 April 2026 mainstream contractors must file nil returns or notify inactivity when CIS 340 requires it (HM Revenue and Customs, CIS 340, section 4, accessed 2026).

Confusing CIS deductions with domestic reverse charge VAT

Problem

You net off VAT reverse charge entries inside the CIS base.

Fix

Keep reverse charge VAT in your VAT return logic and CIS deductions in CIS300.

Checklists

Checklists before you sign off a CIS month

Run these checks so CIS300 figures, bank payments, and subcontractor statements stay aligned.

Before paying

  • Verification outcome saved for every new subcontractor this month
  • Applications for payment show labour, materials, plant, and VAT separately
  • Deduction rate matches the HMRC response, including gross payment instructions
  • Retention and defects adjustments update both gross and CIS base consistently

Filing CIS300

  • Total payments and deductions match your ledgers and bank transfers
  • Subcontractors missing from the return are intentional and documented
  • Nil returns or inactivity notices prepared when no payments were made but filing is due
  • Agent authorisation is current if your adviser submits the return

After filing

  • Payment and deduction statements issued within fourteen days of the tax month end
  • Copies stored with the valuation pack for the same period
  • Subcontractor queries logged before their tax return deadlines
  • Next month's verification diary updated for returning trades

Sources

What HMRC and GOV.UK publish about CIS

These references anchor CIS mechanics in primary guidance rather than informal forums.

  • CIS 340 explains that under the scheme all payments from contractors to subcontractors must take account of the subcontractor's tax status as determined by HMRC, which may require the contractor to make a deduction paid to HMRC from the part of the payment that does not represent the cost of materials incurred by the subcontractor (HM Revenue and Customs, CIS 340, section 1, accessed 2026).

    HM Revenue and Customs, CIS 340 (2026). View source

  • CIS 340 states that the contractor must provide a written statement to every subcontractor from whom a deduction has been made within fourteen days of the end of each tax month, noting that a tax month runs from the sixth of one month to the fifth of the next (HM Revenue and Customs, CIS 340, section 3.17, accessed 2026).

    HM Revenue and Customs, CIS 340 (2026). View source

  • GOV.UK lists what contractors must do under CIS, including registering with HMRC, verifying subcontractors when required, making deductions where due, paying deductions to HMRC, filing monthly returns, and keeping CIS records (HM Revenue and Customs, What you must do as a Construction Industry Scheme (CIS) contractor: Overview, accessed 2026).

    HM Revenue and Customs, What you must do as a CIS contractor: Overview (2026). View source

  • CIS 340 states that the deduction does not apply to any part of a payment that is for the cost of materials used up in construction operations or for VAT (HM Revenue and Customs, CIS 340, section 2.17, accessed 2026).

    HM Revenue and Customs, CIS 340 (2026). View source

  • ICAEW Insights reported in August 2024 that HMRC was writing to contractors as part of a one-to-many campaign, reminding them to verify new subcontractors before payment, to re-verify where CIS returns have not included the subcontractor in the current or previous two tax years, and to apply the correct CIS deductions (ICAEW Insights, Contractors reminded to verify subcontractors, 5 August 2024).

    ICAEW Insights (2026). View source

Related document types

Public bodies, overseas firms, and mixed contracts

Specific CIS rules cover deemed contractors, gang leaders, public bodies from 6 April 2026, and contracts that bundle professional services with construction operations.

Local authorities and public bodies from April 2026

CIS 340 notes that from 6 April 2026 payments to subcontractors that are local authorities or public bodies fall outside CIS, reflecting legislative change referenced in the updated manual (HM Revenue and Customs, CIS 340, section 2, accessed 2026).

Deemed contractors

Businesses whose main activity is not construction can still become contractors when their spend on construction operations exceeds the statutory limit over a rolling twelve months. CIS 340 explains the monitoring duty.

Overseas subcontractors

Treat overseas entities carefully. Verification still matters when they work within United Kingdom construction operations, and permanent establishment questions may need specialist advice.

Mixed supplies with consultants

When a contract bundles architecture with build work, map which payments are construction operations under the legislation rather than assuming one CIS treatment for the entire fee.

Frequently asked questions

Straight answers United Kingdom teams ask about CIS and invoices.

What is the Construction Industry Scheme in simple terms?

CIS is an HMRC system where contractors usually withhold tax on account from payments to many construction subcontractors, send that money to HMRC, file monthly CIS300 returns, and hand subcontractors statements showing the deduction. Materials the subcontractor genuinely incurred and VAT are excluded from the deduction base when rules are met.

Does CIS apply to materials?

CIS deductions target the payment after excluding amounts that represent the subcontractor's materials and VAT, so materials should be identified and evidenced rather than hidden inside one lump sum (HM Revenue and Customs, CIS 340, section 2.17, accessed 2026).

What is gross payment status?

Gross payment status means HMRC allows a subcontractor to be paid without CIS deductions when they meet turnover, compliance, and business tests described on GOV.UK. Contractors must still verify to confirm gross payment before paying.

How is CIS different from VAT?

VAT is a separate tax on taxable supplies with invoice rules in the VAT notice family. CIS changes how much cash a contractor pays across after withholding on account from qualifying labour payments.

What is a CIS300 return?

It is the monthly return contractors file with HMRC summarising payments to subcontractors and deductions withheld, together with payments of those deductions. Nil returns may be required even when no subcontractors were paid once April 2026 rules apply to mainstream contractors.

Do sole traders register for CIS?

Sole traders who work as subcontractors usually register with HMRC for CIS so contractors apply the standard deduction rate after verification. Sole traders who only hire subcontractors may need contractor registration instead.

Can I reclaim CIS deductions?

Subcontractors offset deductions through Self Assessment or, for companies, through PAYE/CIS set-off rules HMRC describes in CIS 340. The exact mechanics depend on your structure.

What if my invoice mixes labour and plant hire?

Separate the elements that CIS treats as included in the deduction base from costs that qualify as excluded materials or hire pass-through, and keep third-party evidence for exclusions.

Does CIS replace the domestic reverse charge for VAT?

No. Reverse charge VAT moves VAT reporting between businesses for certain construction supplies. CIS still governs withholding from subcontractor payments when the CIS tests are met.

Where should I read official CIS guidance?

Start with CIS 340 on GOV.UK, then read the contractor and subcontractor task lists, and speak to a United Kingdom tax adviser when contracts cross borders or employment status is unclear.

Construction billing clarity

Show labour, materials, and VAT so CIS treatment is obvious

Invoice Mama helps you issue structured United Kingdom invoices with line items contractors can map to CIS rules while you keep VAT wording aligned with HMRC expectations.

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