If you run a construction business in the East Midlands — a limited company, a sole trader, a partnership, whether you lay groundwork, wire houses, fit kitchens, plaster, scaffold, roof or project-manage the lot — the Construction Industry Scheme shapes how you get paid and how your tax works. It is not optional, it is not new, and yet it is the single subject where we see otherwise well-run construction businesses lose real money every year.
The losses are rarely dramatic. They are a 30% deduction taken because a subcontractor never registered. A refund sitting unclaimed at HMRC for ten months because the records do not match. A late return that quietly costs a company its gross payment status. None of it is exotic. All of it is avoidable. This guide is the complete walk-through we wish every construction client had read before they started trading.
It is long because CIS is broad. Use the headings to jump to the part you need, and follow the links through to the detailed pieces where we go deeper on a single topic.
What the Construction Industry Scheme actually is.
The Construction Industry Scheme is a set of HMRC rules governing how payments for construction work are treated for tax. At its core it does one thing: it makes the business paying for construction work — the contractor — withhold a slice of the payment to the business doing the work — the subcontractor — and hand that slice to HMRC as an advance payment toward the subcontractor's tax.
The scheme exists because, decades ago, the construction sector had a reputation for cash-in-hand work and unpaid tax. CIS forces tax to be collected at source, before the money reaches the subcontractor, in the same way PAYE collects tax from employees before they are paid. The subcontractor is not an employee — they are a separate business — but the deduction works on a similar principle.
CIS covers most construction work carried out in the UK: site preparation, demolition, building, alterations, repairs, decorating, civil engineering, installing systems for heating, lighting, power, water and ventilation, and cleaning the inside of buildings after construction work. It does not cover work like architecture and surveying, scaffolding hire without labour, carpet fitting, or making materials and plant off-site. The boundaries matter, because misclassifying work is one of the more common ways businesses fall foul of the rules.
What counts as construction work — and what doesn't.
One of the most common questions we field is whether a particular job is inside CIS at all, and the answer is not always obvious. The scheme casts a wide net, but it has clear edges, and the businesses that get caught out are usually those that assumed they were either fully in or fully out without checking.
Work that falls inside CIS includes the things you would expect — constructing, altering, repairing, extending and demolishing buildings and structures — but also a good deal that people forget: site preparation and clearance, laying foundations, erecting scaffolding where labour is supplied, installing systems for heating, lighting, power, water, drainage and ventilation, internal cleaning carried out in the course of construction, and painting and decorating the internal or external surfaces of a building. Civil engineering work such as roads, bridges and groundworks is squarely inside the scheme.
Work that falls outside CIS is narrower but important: professional work by architects, surveyors and consultants; the manufacture or delivery of materials, plant and machinery to site without any installation labour; scaffolding hire on its own with no labour; carpet fitting; and the installation of security systems. Work carried out on a construction site that is not itself construction — running the site canteen, for instance — is also outside the scheme.
Two grey areas cause most of the trouble. The first is "mixed" contracts, where a single job contains both construction and non-construction elements; HMRC's general position is that if any part of the contract is construction work, the whole payment can fall within CIS, which makes the labour and materials split on the invoice all the more important. The second is the distinction between supplying materials with installation (inside CIS) and simply supplying materials (outside). If you are ever unsure which side of the line a job sits on, it is far cheaper to ask before you invoice than to unpick it after HMRC raises a query.
Contractor, subcontractor — or both.
The first thing any construction business has to work out is which side of CIS it sits on. There are three positions, and many businesses occupy more than one.
- Contractor. If you pay subcontractors to do construction work, you are a contractor for CIS purposes and must register as one. This applies whether you are a main contractor running large sites or a small builder who occasionally pays a labourer.
- Subcontractor. If you carry out construction work for a contractor and are paid for it, you are a subcontractor. You are not legally required to register, but if you do not, deductions are taken at the higher 30% rate instead of 20%.
- Both. A great many construction businesses are both. A groundworks company that takes on its own labourers but also subcontracts to a larger main contractor is a contractor and a subcontractor at the same time, and must register in both capacities and meet both sets of obligations.
There is also a fourth, less obvious category. A business that is not in construction at all — a property developer, a landlord with a large portfolio, a manufacturer — can be pulled into CIS as a "deemed contractor" if its spending on construction operations exceeds a set threshold over a rolling three-year period. If you have a large property or refurbishment programme, this is worth checking, because being a deemed contractor brings the full contractor obligations with it.
The three deduction rates: 0%, 20% and 30%.
CIS deductions are taken from the labour element of a subcontractor's invoice. There are three possible rates, and which one applies depends entirely on the subcontractor's registration status.
- 30% — unregistered. If a subcontractor is not registered with HMRC for CIS, the contractor must deduct 30%. This is the penalty rate, and it ties up a third of every labour payment until it is reclaimed.
- 20% — registered. A subcontractor registered under CIS has 20% deducted. This is the standard position for most subcontractors.
- 0% — gross payment status. A subcontractor who holds gross payment status is paid in full with no deduction at all. They settle their tax through their normal corporation tax or self-assessment returns instead. This is the most cash-efficient position, and we explain how to get there below.
Crucially, the deduction applies only to labour. Materials, VAT, plant hire, fuel for plant, and certain other costs are excluded from the calculation. A subcontractor who invoices £10,000 of labour and £4,000 of materials, registered at the 20% rate, has £2,000 deducted — 20% of the £10,000 labour, not 20% of the £14,000 total. Getting the labour and materials split right on every invoice is one of the most basic and most frequently botched parts of CIS.
Registering for CIS.
Registration is handled through HMRC and depends on your role.
As a contractor, you register for CIS as part of setting up as an employer, through HMRC's online services. Once registered, you are issued with the accounts you need to verify subcontractors, file monthly returns and make payments.
As a subcontractor, you register through your business tax account or by contacting the CIS helpline. A limited company registers using its Unique Taxpayer Reference and company details; a sole trader registers under their own UTR and National Insurance number. Registering takes the deduction rate from 30% down to 20% and is almost always worth doing immediately — the difference is a tenth of every labour payment tied up needlessly.
If you operate as both, you complete both registrations. The two roles are tracked separately by HMRC, and the obligations do not cancel each other out: you still verify and pay your own subcontractors as a contractor, and you are still verified and paid under deduction by the contractors above you.
Verifying subcontractors.
Before a contractor pays a subcontractor for the first time, it must verify them with HMRC. Verification confirms whether the subcontractor is registered and tells the contractor which deduction rate to apply — 0%, 20% or 30%. It is done online through the CIS service or through commercial software, and HMRC returns a verification number.
Verification is not a one-off formality to be skipped. Applying the wrong rate because a subcontractor was never verified is a compliance failure that lands on the contractor, not the subcontractor. If you take on subcontractors, build verification into your onboarding so that nobody gets paid before they are checked.
Monthly CIS returns, statements and nil returns.
Contractors carry the bulk of the monthly administration. Every month, a contractor must:
- File a CIS return (the monthly return, historically the CIS300) reporting every subcontractor paid in the tax month, the amounts paid, and the deductions taken. The tax month runs to the 5th, and the return is due by the 19th of the same month.
- Give each subcontractor a payment and deduction statement — the document the subcontractor needs to prove how much tax has already been taken. Without these statements, a subcontractor cannot easily reconcile or reclaim their deductions.
- Pay the deductions over to HMRC alongside PAYE, by the 22nd of the month if paying electronically.
Late filing carries automatic penalties that escalate quickly — a fixed penalty kicks in the day after the deadline and rises the longer the return is outstanding. The penalty regime is one of the reasons CIS is unforgiving for the disorganised.
One change worth flagging up front, because it catches people out: contractors are now expected to file a return even in months where no subcontractors were paid. Where you would once simply have filed nothing, a nil return is the safer route, and recent rule changes have hardened this expectation. We cover that next.
The April 2026 CIS changes.
HMRC tightened the Construction Industry Scheme from April 2026, and the changes matter most to subcontractors who hold — or want — gross payment status. In short, the compliance bar for getting and keeping gross status has risen, the rules around monthly nil returns have hardened, and the consequences of losing status have grown teeth, including a substantially longer wait before a fresh application can be made.
If you are a construction limited company, these are the changes most likely to affect you directly, and they reward the businesses that already run a tight monthly process while penalising the ones that treat filing deadlines as flexible. We have written a dedicated breakdown of exactly what changed and what to do about it: read the CIS changes April 2026 guide.
Gross payment status — the biggest cash-flow lever.
For a subcontractor, gross payment status is the single most valuable thing CIS offers. With it, contractors pay your invoices in full, with no 20% deduction. You still owe exactly the same total tax — you simply hold your own money in your own bank account until the tax falls due, rather than lending it to HMRC interest-free for months.
For a construction company turning over meaningful labour, the working capital this frees up is significant and permanent. It also removes any dependence on contractors getting your deduction statements right, and it can quietly help win work, because some main contractors prefer subcontractors who do not add to their CIS administration.
Gross payment status is not handed out on request. HMRC applies three tests — a business test, a turnover test and, most importantly, a compliance test covering the previous twelve months of filings and payments — and most failed applications fail on compliance. Once granted, the status is reviewed annually and can be removed for slips. We walk through all three tests, the application process, and how to keep the status, here: how to apply for CIS gross payment status.
CIS and limited companies: getting your deductions back.
This is the part that trips up more construction limited companies than any other, so it is worth being precise. When a contractor deducts 20% from your company's labour invoices, that money is not lost — it is an advance payment of your company's tax. But the way a limited company reclaims it is different from a sole trader.
A sole trader simply offsets CIS suffered against the tax due on their self-assessment return, and any surplus is refunded after 31 January. A limited company cannot do that. Instead, the company recovers the CIS it has suffered by offsetting it against the PAYE and CIS it owes as an employer, reported each month on the Employer Payment Summary. If the company has suffered more CIS than it owes in PAYE — which is common for labour-only subcontractors with few or no employees — the surplus builds up across the year and is refunded by HMRC after the tax year-end.
The refunds are real money and they are frequently substantial. They are also frequently delayed, because HMRC cross-checks the company's claimed deductions against the returns filed by the contractors who paid it. If a contractor filed late, filed wrong, or never issued the deduction statements, the figures do not reconcile and the refund stalls — we have seen six to ten month delays. Accurate monthly bookkeeping, kept in step with the deduction statements you receive, is what keeps these refunds moving. We explain the full mechanism and the common blockers here: CIS refunds for limited companies.
Sole trader or limited company — how CIS differs.
How CIS plays out depends a great deal on whether you trade as a sole trader or through a limited company, and the difference is sharpest at refund time. A sole-trader subcontractor has CIS deducted from their labour and reclaims it straightforwardly on their self-assessment return: the deductions are set against the income tax and National Insurance due, and any excess is repaid after the 31 January deadline. For many sole traders the CIS already suffered covers most or all of the tax bill, and a repayment follows.
A limited company cannot use self-assessment to reclaim CIS at all. As explained above, it recovers deductions through its employer scheme and the Employer Payment Summary, with surpluses refunded after the year-end. That difference is one of several factors worth weighing when deciding which structure suits a growing construction business — alongside the tax efficiency of salary and dividends, limited liability, and the administrative load. We compare the two structures in general terms in our guide to sole trader versus limited company, but the CIS angle specifically is one many builders overlook: incorporating changes not just your tax rates but the entire mechanism by which your construction deductions come back to you.
There is no single right answer. A subcontractor netting modest profits may be perfectly well served as a sole trader, while one with growing turnover, employees of their own and an eye on gross payment status will usually be better off incorporated. The point is to make the choice deliberately, with the CIS consequences understood, rather than drifting into a structure and discovering the refund process works differently from what you expected.
CIS and VAT: the domestic reverse charge.
Sitting alongside CIS is a VAT rule that confuses almost everyone in construction the first time they meet it: the domestic reverse charge for building and construction services. It has applied since March 2021 and works hand-in-hand with CIS.
Under the reverse charge, when one VAT-registered construction business supplies certain construction services to another VAT-registered business that is not the end user, the supplier does not charge VAT on the invoice. Instead, the customer accounts for both the output VAT and the input VAT on their own VAT return. The supplier's invoice states that the reverse charge applies and shows the VAT rate that would have applied, but charges no VAT itself.
The reverse charge applies to supplies that fall within CIS and are made between VAT-registered businesses in the supply chain. It does not apply to supplies to the end user — the person or business the building work is ultimately for — nor to zero-rated supplies. The practical effect for many subcontractors is a noticeable change in cash flow, because they no longer collect VAT from their contractor customers to hold until the VAT return is due. Getting the invoicing wording and the VAT return treatment right is essential, and it is an area where construction businesses regularly need a hand.
Records, deadlines and the rhythm of a CIS year.
CIS is a monthly discipline, not an annual one, and the businesses that find it painless are the ones that build a rhythm around it. For a contractor that rhythm is: verify before you pay, record every payment with the labour and materials split correct, file the monthly return by the 19th, issue deduction statements, and pay HMRC by the 22nd. For a subcontractor it is: keep every deduction statement, reconcile what was deducted against what your records say, and make sure the company's monthly payroll filings claim the CIS suffered.
Underpinning all of it is bookkeeping. CIS sits on top of your normal accounting, and if the underlying records are loose, the CIS figures will be wrong. This is why we put construction clients on Xero with CIS tracking switched on from day one — it turns the monthly return into a review rather than a reconstruction, and it keeps the deduction figures clean for when the year-end refund claim comes around.
The most common CIS mistakes we see.
Across the construction businesses we act for, the same handful of errors come up again and again:
- Not registering as a subcontractor and suffering 30% deductions for months before anyone notices. The fix is immediate registration; the cost is the working capital tied up in the meantime.
- Getting the labour and materials split wrong, so the contractor deducts CIS on materials that should have been excluded — or the subcontractor cannot evidence the split when HMRC asks.
- Missing the monthly return deadline and triggering escalating penalties, sometimes for a month where only one subcontractor was paid.
- Never claiming the limited company refund, because the company offsets CIS against PAYE incorrectly or simply does not realise the surplus is reclaimable.
- Losing gross payment status to a single late payment, and then not knowing how to get it back.
- Mishandling the VAT reverse charge, either charging VAT that should not be charged or failing to account for it on the customer side.
Every one of these is preventable with a proper monthly process and an accountant who understands construction rather than treating CIS as an afterthought.
What CIS penalties actually cost.
CIS penalties are worth understanding in detail, because they are automatic, they escalate, and they are levied on the contractor for failures in the monthly return — not on the subcontractor. The penalty regime is one of the main reasons CIS punishes disorganisation so heavily.
For a late monthly return, the penalties stack up on a fixed timetable. A return that is even one day late attracts an initial fixed penalty. If it is still outstanding after two months, a further penalty is added. At six months and again at twelve months, larger penalties apply, calculated as the greater of a fixed sum or a percentage of the deductions that should have been reported. The result is that a single forgotten return, left unaddressed, can grow from a modest fixed penalty into a figure that genuinely hurts a small construction business — and it can do so for a month in which only one or two subcontractors were paid.
There is some protection for new and occasional contractors: a cap applies to the fixed penalties for the first returns filed late by a new contractor, and HMRC will cancel penalties for months where you genuinely had no obligation to file. But relying on that protection is a poor substitute for simply filing on time, and HMRC has become less forgiving of repeated lateness.
Separately, incorrect returns — whether through carelessness or, worse, deliberate understatement — can attract penalties based on the tax at stake and the behaviour behind the error. And for subcontractors, the cost of getting it wrong is different but just as real: an unregistered subcontractor loses a third of every labour payment to deductions until they register, and a gross payment status holder who slips on filings or payments risks losing the status at the annual review, dropping straight back to 20% deductions on every invoice. In construction, where margins are tight and cash flow is everything, none of these are abstract risks — they are working capital walking out of the door.
CIS across the East Midlands.
Construction is a major part of the economy right across our patch — Ashby-de-la-Zouch, Swadlincote, Burton upon Trent, Coalville, Woodville, Church Gresley and the villages around them. We act for groundworkers, bricklayers, electricians, joiners, plasterers, scaffolders, roofers, plant operators and general builders, most of them running through limited companies, many of them both contractor and subcontractor.
The pattern we see locally is consistent: hard-working construction businesses leaving money on the table through CIS, not through any fault of their own but because nobody ever sat down and walked them through it. The monthly returns, the verification, the labour and materials split, the limited company refund, the gross payment status application — this is routine work for the firm, and it is some of the most immediately valuable work we do, because the cash impact is real and quick.
How Barton helps with CIS.
For a construction client, the CIS side of what we do covers the full cycle: registering you correctly as contractor, subcontractor or both; setting up Xero with CIS tracking so the monthly numbers are clean; running your monthly CIS returns and issuing deduction statements on time; handling your payroll and the Employer Payment Summary so the company reclaims every pound of CIS suffered; preparing and submitting gross payment status applications and managing the twelve-month compliance run that goes with them; and getting the VAT reverse charge right on every invoice.
We are a two-director ICAEW Chartered firm, and construction CIS is one of the areas we know best. If you run a construction business anywhere across the East Midlands and CIS feels like a source of friction, lost cash, or simply uncertainty, that is exactly the conversation we are here to have. Get a free quote or call us and we will tell you, plainly, where the money is going and what to do about it.
CIS rarely costs construction businesses through one big mistake. It costs them through a dozen small ones — a missed registration, a late return, an unclaimed refund — that quietly add up over a year. Getting the process right turns all of that back into cash in your account.
Frequently asked questions
What is the Construction Industry Scheme (CIS)?
A set of HMRC rules for how payments for construction work are taxed. A contractor deducts money from a subcontractor's payment and passes it to HMRC as an advance payment toward the subcontractor's tax and National Insurance. It covers most construction work carried out in the UK.
Who has to register for CIS?
Contractors who pay subcontractors must register. Subcontractors should register too, because registered subcontractors have 20% deducted rather than 30%. Many businesses are both contractor and subcontractor and register in both capacities. Large non-construction spenders can also be deemed contractors.
What are the CIS deduction rates?
Three rates: 30% for unregistered subcontractors, 20% for registered subcontractors, and 0% for those holding gross payment status. Deductions apply only to the labour element, not to materials, VAT or plant.
Do limited companies get their CIS deductions back?
Yes. A limited company reclaims CIS suffered by offsetting it against the PAYE and CIS it owes as an employer, via the Employer Payment Summary, with any surplus refunded after the year-end. Delays are common when company records do not match contractor records, which is why clean monthly bookkeeping matters.