What is CIS Deduction and How Does It Work?

If you work in construction — whether as a contractor paying subbies or as a subcontractor getting paid — you've almost certainly come across CIS. But the Construction Industry Scheme trips up a lot of people, particularly when it comes to deduction rates, registration, and monthly filing obligations.

Here's a straightforward breakdown of how it works.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of rules that governs how payments are made between contractors and subcontractors in the UK construction industry. HMRC introduced it to reduce tax evasion in the sector.

Under CIS, contractors are required to deduct money from their subcontractors' payments and pass it directly to HMRC. These deductions count as advance payments towards the subcontractor's tax and National Insurance bill — so it's not additional tax, just tax paid earlier and differently.

Who does CIS apply to?

CIS applies to most work in the construction industry, including building, alterations, repairs, decorating, civil engineering and demolition. It applies whether you're a sole trader, partnership or limited company.

You're a contractor under CIS if you pay subcontractors to carry out construction work — even if your main business isn't construction. Developers, property investors and some public bodies can also fall into this category.

You're a subcontractor under CIS if you're paid by a contractor to carry out construction work. Many people in construction are both — they subcontract work out and are also subcontracted by others.

What are the CIS deduction rates?

This is where most confusion happens. There are three possible deduction rates:

Status	Deduction rate
Registered subcontractor (verified)	20%
Unregistered subcontractor	30%
Gross payment status	0%

20% deduction applies to subcontractors who are registered with HMRC for CIS. The contractor verifies them with HMRC before making payment, and deducts 20% from the labour element of the invoice (not materials).

30% deduction applies if HMRC can't verify the subcontractor — usually because they haven't registered for CIS. This higher rate is a deliberate incentive to register.

Gross payment status means no deduction at all. It's available to subcontractors who meet HMRC's criteria around turnover, compliance history and business banking. If you're eligible, it's worth applying for — it significantly improves cash flow.

What gets deducted — and what doesn't?

The deduction only applies to the labour element of the payment. Materials, plant hire and other reimbursable costs are excluded. So if a subcontractor invoices £5,000 for labour and £2,000 for materials, the deduction only applies to the £5,000.

This is an important distinction and one that's frequently got wrong — either deducting from the full invoice or failing to separate materials clearly enough.

What are the contractor's obligations?

If you're a contractor paying subcontractors, you must:

• Register as a contractor with HMRC before making any CIS payments

• Verify each new subcontractor with HMRC before their first payment to confirm the correct deduction rate

• Deduct the correct amount from each payment and pass it to HMRC

• Issue monthly deduction statements to each subcontractor so they know what's been deducted

• File a monthly CIS return (CIS300) with HMRC by the 19th of each month, detailing all subcontractor payments and deductions

Miss your monthly CIS300 return and penalties apply from day one — £100 for the first month, rising the longer it remains unfiled.

What does the subcontractor do with the deductions?

The amounts deducted appear on your monthly deduction statements from each contractor. When you complete your Self Assessment tax return (or your company's accounts), the deductions are offset against your total tax liability. If HMRC has taken too much across the year, you'll get a refund. If not enough, you'll pay the difference.

For limited company subcontractors, CIS deductions can be offset against PAYE liabilities — which can create a useful cash flow benefit if managed correctly.

Common CIS mistakes to avoid

• Failing to verify subcontractors before payment — if you deduct at the wrong rate, the liability stays with you as the contractor

• Deducting from materials — HMRC is clear that materials are excluded; over-deducting creates problems for your subcontractors

• Missing the monthly CIS300 deadline — the 19th of each month is a hard deadline

• Not registering as a subcontractor — operating unregistered means a 30% deduction instead of 20%

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At Evolve Business, we handle CIS returns for contractors and help subcontractors keep their records straight. We file your monthly CIS300 with HMRC, issue deduction statements to all your subcontractors, and verify new starters — all for a straightforward per-subcontractor fee. Get in touch to find out more, or see our payroll and CIS pricing.