CIS explained for people on the tools: deductions, returns and getting your money back

Ask a room of tradespeople what CIS is and you will get two answers. Half say it is a tax. The other half say it is the reason there is never any money in the account in November. Neither is quite right, and the gap between them is where a lot of otherwise healthy trades businesses get into trouble.

The Construction Industry Scheme is a withholding system. A contractor takes money off a subcontractor's invoice and pays it to HMRC on the subcontractor's behalf. Nothing about your actual tax bill changes. What changes is the timing — and timing is the whole game in a business that buys materials before it gets paid.

Who it applies to

CIS covers most site work: groundworks, alterations, repairs, demolition, decorating, and installing systems for heating, lighting, power, water and ventilation. It does not cover architecture and surveying, carpet fitting, scaffolding hire without labour, or the delivery of materials. If you are a sole trader paid by a builder, you are a subcontractor. If you pay anyone else to do construction work for you, you are also a contractor — including if you are a limited company that subs out one job a year.

There is a change worth knowing about this year. From 6 April 2026, payments made by local authorities and certain other public bodies fall outside CIS altogether, so a contractor invoicing a council directly is no longer having deductions taken at that link in the chain.

The three rates, and what they come off

There are only three: 20% for a registered subcontractor, 30% for one who is not registered or cannot be verified, and 0% for a subcontractor with gross payment status.

The deduction is taken off labour only. Materials, plant hire the subcontractor has paid for, and VAT are all excluded — which is why the invoice has to split them out.

Say you invoice £4,000, made up of £2,800 labour and £1,200 materials. Verified at the standard rate, the deduction is 20% of £2,800, so £560 goes to HMRC and £3,440 reaches your bank. Unregistered, the same invoice loses £840. That £280 difference on a single job is why registering is the highest-return half hour in the trade.

One more layer catches people out: for most CIS-registered business-to-business construction supplies the VAT domestic reverse charge applies, so you do not charge VAT at all and the customer accounts for it. The cash landing in your account is therefore smaller again than the old habit of banking the VAT and worrying later — which, to be fair, was never a plan.

It is a payment on account, not a tax

For a sole trader, everything deducted is credited against your Self Assessment bill. Put the deduction statements somewhere you will find them, because they are your evidence, and a year of full deductions on labour-heavy work very often produces a repayment rather than a bill.

For a limited company it works differently and this is where the cash-flow damage happens. A company cannot set CIS suffered against its corporation tax directly. It reclaims through payroll, by reporting the CIS suffered on an Employer Payment Summary each month and offsetting it against PAYE, National Insurance and any CIS you owe as a contractor. Anything still unused at the end of the tax year is refunded after you claim it.

So a company subcontractor with two people on the books and a small PAYE bill can spend a whole year having 20% withheld while only recovering a trickle of it each month. On £250,000 of labour turnover that is £50,000 sitting with HMRC. The business is profitable. It just has no money — which is exactly the difference between cash flow and profit playing out in a bank account.

CIS doesn't change what you owe. It changes when you have it, and a business can be perfectly profitable and still run out of it.

If you pay subbies, you have a filing job

Register as a contractor before the first payment. Verify every new subcontractor with HMRC before you pay them, because paying an unverified subbie at 20% when they should have been at 30% leaves you owing the difference. File a monthly return by the 19th, covering the tax month that ended on the 5th, and give every subcontractor a payment and deduction statement within 14 days of that month end.

Nil months still need a return. The penalties are automatic and unforgiving: £100 the day the return is late, £200 at two months, and £300 or 5% of the deductions — whichever is higher — at six months and again at twelve. Three late months is three separate penalties, not one.

And CIS is not an employment status test. A subcontractor who works only for you, on your hours, with your tools, is very likely an employee whatever the paperwork says. The scheme does not settle that question and will not protect you from it.

Gross payment status: worth having, easier to lose

Gross payment status means no deduction at all, and for a labour-heavy firm it is transformational. To get it you must pass a business test, a turnover test — broadly £30,000 of labour turnover for a sole trader, £30,000 per director or £100,000 for a company — and a compliance test that now includes your VAT record as well as your PAYE and returns.

Guard it. From 6 April 2026 HMRC can remove gross payment status with immediate effect where a business made or received a payment it knew, or should have known, was connected to fraud, assess the tax lost, and charge a penalty of up to 30%. Losing it mid-contract turns 0% into 20% overnight on every invoice.

The Monday checklist

Register if you have not. Split labour and materials on every quote and every invoice — get that right at the quoting stage, not on the invoice. Keep every deduction statement. If you are a company, file the Employer Payment Summary every month rather than at year end, because unclaimed CIS is your own money on loan to HMRC. Diarise the 19th. And forecast the withheld cash as a separate line, so the November hole is something you saw coming in March.

Common questions

Does CIS come off materials as well as labour?

No. The deduction applies to the labour element only, and materials the subcontractor has genuinely paid for are excluded, as is VAT and plant hire the subcontractor bought in. That makes the invoice split the single most valuable line of admin in the trade. On a £4,000 invoice with £1,200 of materials, a 20% deduction on the £2,800 labour costs £560; if the whole £4,000 is deducted against because the invoice was one undifferentiated line, it costs £800. HMRC expects the materials figure to be the actual cost, not a rounded guess, so keep the supplier invoices with the job.

I'm a limited company subcontractor — how do I get the deductions back?

Through payroll, not through the corporation tax return. Each month you report the CIS suffered on an Employer Payment Summary, and HMRC offsets it against the PAYE, National Insurance and any contractor CIS your company owes for that period. Anything left unused at the end of the tax year is repaid once you claim it, or set against other liabilities. The practical trap is filing the EPS annually instead of monthly: the offset only works against liabilities in periods you have reported, so a company with a small payroll can sit on a large unrecovered balance for a whole year without realising.

Do I need to file a CIS return in a month when I paid no subcontractors?

Yes, unless you have told HMRC the scheme is inactive. A nil return carries exactly the same deadline — the 19th of the month — and exactly the same automatic penalty for missing it, starting at £100 on the first day and rising to £200 after two months. If you know you will not be using subcontractors for a while you can ask HMRC to make the scheme inactive for up to six months, which suspends the filing requirement; the returns restart automatically after that. Set a recurring calendar reminder either way, because the penalty applies whether or not any money moved.

Does having CIS deducted mean someone is definitely self-employed?

No, and assuming otherwise is one of the more expensive mistakes in construction. CIS is a payment scheme, not a status test. If a worker turns up when you tell them, uses your tools and materials, cannot send a substitute and works for nobody else, HMRC can find they were an employee all along — with PAYE, employer National Insurance at 15%, holiday pay and employment rights following behind. The deduction paperwork will not defend you. Decide status against the actual working arrangement first, use HMRC's status checking tool, and keep the reasoning on file with the contract.