The Construction Industry Scheme is a United Kingdom tax rule set operated by HMRC that requires most contractors who pay subcontractors for construction operations to register, verify each subcontractor where the rules say you must, then withhold tax on account from the payment except for amounts that represent the subcontractor's own materials and certain other excluded costs. HMRC tells you the deduction rate to use after verification, which is commonly the standard rate for registered subcontractors, the higher rate where HMRC cannot match the subcontractor, or no deduction where gross payment status applies. Contractors pay withheld amounts to HMRC, file CIS300 returns, and give subcontractors written statements when deductions apply. CIS is separate from VAT, so VAT-registered businesses still show VAT on invoices under HMRC's VAT rules while CIS only affects how much cash the contractor pays across after CIS. This guide summarises public GOV.UK and CIS 340 guidance. It is practical commentary only and is not tax or legal advice. Confirm your facts with HMRC or a qualified United Kingdom tax adviser.
Context
CIS fixes how much money moves after labour is priced, while VAT Notice 700 fixes how you label VAT on taxable supplies once you are VAT registered. The points below tie HMRC CIS 340 mechanics to habits site managers and accounts teams expect on United Kingdom construction jobs.
HMRC explains in CIS 340 that the scheme sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry and certain other businesses, including taking account of each subcontractor's tax status when money is paid (HM Revenue and Customs, Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340)).
CIS 340 states that a contractor may need to make a deduction paid to HMRC from that part of the payment that does not represent the cost of materials incurred by the subcontractor, and that the deduction does not apply to any part of a payment that is for the cost of materials or VAT (HM Revenue and Customs, CIS 340, sections 1 and 2.17).
Verification is the process HMRC uses so the correct rate of deduction 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). Current percentage figures sit on GOV.UK under "Make deductions and pay subcontractors" so you always read the live page before you price cash flow.
Because CIS deductions are calculated from the amount after legitimate exclusions, muddy descriptions force contractors to guess or default to conservative treatment, which slows payment. HMRC's example payment and deduction statement in CIS 340 shows gross amounts, materials, and the amount liable to deduction as separate lines (HM Revenue and Customs, CIS 340, example statement).
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).
Sources
These points come from HMRC CIS 340 and HMRC's contractor duties on GOV.UK. They show why verification, materials evidence, and monthly paperwork belong in one site checklist.
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 Introduction).
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 so the statement must be provided by the nineteenth of the month (HM Revenue and Customs, CIS 340, section 3.17).
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).
HM Revenue and Customs, CIS contractor duties (GOV.UK overview) (2026). View source
Workflow
Work through registration, subcontractor onboarding, verification, priced applications with split lines, deduction statements, CIS300 filing, and Self Assessment or corporation tax reconciliation in order. If you are unsure whether work is a construction operation, pause for specialist advice before you assume CIS does not apply.
Use the CIS registration routes HMRC publishes for contractors who pay subcontractors for construction operations and for subcontractors who want standard or gross payment treatment. Keep your Unique Taxpayer Reference and employer references ready because verification and returns rely on them (HM Revenue and Customs, What you must do as a CIS contractor: How to register; What you must do as a CIS subcontractor: How to register).
Follow GOV.UK verification guidance so HMRC can confirm registration and tell you the deduction rate, if any. CIS 340 explains you do not need to verify again if you already included that subcontractor on a return in the current or previous two tax years, with examples for re-engagements (HM Revenue and Customs, CIS 340, section 3.2; HM Revenue and Customs, Verify subcontractors).
Tip: ICAEW noted HMRC one-to-many letters in 2024 that targeted weak verification habits, so treat this as a board-level control, not a payroll afterthought (ICAEW Insights, 5 August 2024).
Show United Kingdom VAT separately when you are VAT registered under HMRC VAT rules, while keeping materials and stated exclusions visible so the contractor can run CIS 340 maths without a dispute. Remember CIS 340 excludes the VAT element from the deduction base (HM Revenue and Customs, CIS 340, section 2.17; HM Revenue and Customs, VAT Notice 700).
Store verification references, especially where HMRC instructs the higher rate, because CIS 340 expects those references on returns and statements when the higher rate applies (HM Revenue and Customs, CIS 340, sections 3.15 to 3.17).
Meet the fourteen-day-from-tax-month-end rule CIS 340 sets out so subcontractors can reconcile deductions against their tax position (HM Revenue and Customs, CIS 340, section 3.17).
CIS 340 explains monthly return filing and paying deductions to HMRC's accounts office, including electronic payment windows where you pay electronically (HM Revenue and Customs, CIS 340, sections on monthly returns and paying deductions).
CIS 340 explains that subcontractors set deductions against liabilities in defined ways, including company set-off rules against PAYE and other amounts due, so finance leads should map statements into the correct return, not leave them in a job-costing folder (HM Revenue and Customs, CIS 340, section 1.11).
Checklists
Use these lists as guardrails before you release cash and before you close CIS300.
Pitfalls
Most pain comes from skipping verification, blending materials with labour on one line, or treating CIS as a substitute for VAT compliance.
Problem
CIS 340 sets clear tests for when you must verify. HMRC campaigns described by ICAEW in 2024 focused on contractors who applied wrong deductions after weak verification discipline.
Fix
Run verification through HMRC or compliant software every time CIS 340 and GOV.UK require it, then store the HMRC response with the job file.
Problem
Contractors must exclude genuine materials costs from the deduction calculation under CIS 340. A single blended line invites dispute or conservative withholding.
Fix
Split schedule lines, attach delivery dockets for major materials, and agree how plant hire passes through before you submit the application.
Problem
CIS is a withholding mechanism on certain construction payments. VAT-registered businesses still follow VAT Notice 700 for VAT invoices and returns.
Fix
Train estimators to speak about "CIS cash retention" separately from "VAT shown on the invoice" so customers see both numbers clearly.
Problem
CIS 340 requires written statements within fourteen days of the tax month end when deductions apply, which supports the subcontractor's tax records.
Fix
Automate statement generation from the same data you use for CIS300 so finance cannot ship the return without issuing statements.
Straight answers for United Kingdom contractors, subcontractors, and finance staff who share the same payment run.
Most businesses that pay subcontractors for construction operations must register as contractors, and subcontractors who want standard or gross treatment register separately. Read GOV.UK contractor and subcontractor overviews for the exact triggers that apply to your entity.
HMRC operates a standard rate for registered subcontractors paid under deduction, a higher rate where HMRC cannot match the subcontractor, and nil deductions for subcontractors with gross payment status. Percentages change rarely but can change, so read the live GOV.UK page "Make deductions and pay subcontractors" whenever you quote net cash to a subcontractor.
CIS 340 states the deduction does not apply to the part of the payment that represents the cost of materials incurred by the subcontractor, subject to evidence and anti-avoidance rules elsewhere in the manual. VAT is also excluded from the deduction calculation.
You must verify new subcontractors before paying them under CIS when required, and CIS 340 explains you must also verify subcontractors you have used before if you have not included them on a CIS return in the current or previous two tax years, with examples in section 3.2.
Subcontractors who meet HMRC tests can receive payments without deductions. CIS 340 explains gross payment in overview terms, while GOV.UK covers how to apply and what compliance HMRC reviews.
CIS 340 states contractors must provide a written statement within fourteen days of the end of each tax month when a deduction was made, with the nineteenth calendar day deadline explained in the same section.
VAT follows VAT Notice 700 once you are VAT registered. CIS only changes how much cash the contractor forwards after lawful withholding. Show VAT in sterling on VAT invoices while keeping CIS-relevant lines clear for the paying contractor.
Start from HMRC CIS 340 on GOV.UK, then use the contractor and subcontractor task lists HMRC publishes for day-to-day compliance.
Use your accounting or job management system as the system of record for HMRC references. Invoice Mama focuses on clear invoices and quotes so every party sees materials, labour, and VAT consistently.
Keep learning
United Kingdom construction teams often pair CIS discipline with VAT registration and invoice field checks.
HMRC full and simplified VAT invoice fields when you are VAT registered alongside CIS work.
Read guideGOV.UK thresholds and Making Tax Digital readiness when your construction turnover also triggers VAT registration.
Read guideAustralian contractor parallels when you compare withholding and tax invoice rules across markets.
Read guideReminder cadence ideas that still help United Kingdom credit control teams even though the statute references differ.
Read guideFrom application to payment statement
Invoice Mama helps you issue clear United Kingdom invoices with line items your contractor can map to CIS rules while you register with HMRC and keep deduction paperwork consistent.