The Construction Industry Scheme (CIS), explained simply

If you work in construction and you've heard people talk about "CIS" or money being "taken off at source", the Construction Industry Scheme is what they mean. It's HMRC's way of collecting tax on construction payments, and it changes how money moves between contractors and subcontractors. It catches a lot of tradespeople out, so it's worth understanding the basics. Here is what CIS is, who it applies to, and how the deductions work, in plain English. This is general information, not tax advice, so check gov.uk or speak to an accountant for your own situation, including current rates.

What CIS actually is

The Construction Industry Scheme is a set of HMRC rules for how payments for construction work are handled between businesses. Under it, a contractor doesn't pay a subcontractor the full amount for their labour. Instead, the contractor deducts a slice, passes that straight to HMRC as an advance towards the subcontractor's tax and National Insurance, and pays the subcontractor the rest. It's not an extra tax; it's tax collected earlier than it otherwise would be. The subcontractor accounts for it later when they do their own tax return.

Contractor or subcontractor: which are you?

CIS splits the people involved into two roles, and you can be one, the other, or both at once, which is where it gets confusing. Work out which applies to each job.

• Contractor: a business that pays subcontractors for construction work. If you take on other trades and pay them, you're acting as a contractor for that work.
• Subcontractor: a business that does construction work for a contractor and gets paid by them. If you work for another firm who pays you, you're their subcontractor.
• Both: plenty of trades are subcontractor on one job and contractor on another, for example working for a builder while also paying your own labourer.

How the deduction works

The key thing to grasp is who deducts and what from. When a contractor pays a subcontractor, the contractor is the one responsible for making the deduction and sending it to HMRC. The deduction comes off the labour part of the payment, not the materials. So if an invoice covers both labour and materials, the materials portion is generally left out of the deduction calculation, and the percentage is applied to the labour element. Getting your invoices to separate labour from materials clearly matters, because it affects how much is deducted.

Registered versus unregistered rates

How much gets deducted depends on whether the subcontractor is registered for CIS with HMRC, and this is the single biggest reason to sort your registration out.

• Registered for CIS: deductions are made at the standard rate, which has been 20% of the labour element. Being registered means less is held back.
• Not registered: deductions are made at the higher rate, which has been 30%. Not registering simply means more of your money is held back until you reconcile it later.
• Gross payment status: some subcontractors who meet HMRC's conditions can be paid in full with no deduction, accounting for all the tax themselves at year end.

Treat those percentages as the long-standing figures rather than gospel, because rates and thresholds can change. Always check the current rates on gov.uk before you rely on a number.

Monthly returns and records

If you're a contractor under CIS, the responsibility doesn't end at making the deduction. You generally have to file a return to HMRC each month, telling them about the payments you've made to subcontractors and the deductions you've taken, and give each subcontractor a statement of what was deducted. Miss the returns and penalties can stack up quickly. As a subcontractor, keep every deduction statement, because that's your proof of tax already paid when you do your own return and work out whether you're owed a refund or owe more.

Why it matters on your quotes and invoices

CIS affects how you present money on construction work, even though it's a tax matter rather than a quoting one. Because the deduction comes off labour and not materials, separating the two clearly on your invoices isn't just tidy, it directly affects the deduction. And if you're a subcontractor being paid under CIS, remember the figure that lands in your account isn't your final position: some of it is sitting with HMRC against your tax. Build that into how you think about cash flow so a deduction doesn't catch you short.

For laying out labour and materials clearly so deductions are calculated correctly, see what every professional quote should include, and for handling VAT alongside it, our guide on VAT for sole traders. This is general information, not tax advice, so check gov.uk or speak to an accountant for your own situation and the current rates.