CIS from scratch. What it is, who it affects, and how to stay on the right side of HMRC.
CIS is a scheme where contractors in the construction industry deduct money from subcontractors' payments and pass it to HMRC. The deductions count as advance payments of the subcontractor's tax and National Insurance. CIS applies to construction work in the UK including building, decorating, plumbing, heating, electrical, roofing, plastering, carpentry, and demolition. It does not apply to architecture, surveying, or the manufacture of building materials off-site.
You are a contractor if you pay subcontractors for construction work and either (a) your main business is construction, or (b) you spent more than £3 million on construction in the 12 months since you made your first payment under a construction contract. Property developers, housing associations, and government bodies are also contractors under CIS. If you only use your own employees and never pay subcontractors, CIS does not apply to you.
Contractors must register with HMRC as a contractor before taking on their first subcontractor. Subcontractors should register too — if you are not registered, the contractor deducts at 30% instead of 20%. Register online at gov.uk or by calling HMRC. You will need your UTR (Unique Taxpayer Reference) and National Insurance number. Registration is free.
Before paying a subcontractor for the first time, the contractor must verify them with HMRC. Verification confirms the subcontractor's identity and tells you which deduction rate to apply: 0% (gross payment status), 20% (registered), or 30% (not registered). You verify online through HMRC's CIS service using the subcontractor's name, UTR, and NI number. You must verify before the first payment — applying the wrong rate makes you liable for the difference.
Three rates: 20% for subcontractors registered with HMRC (the standard rate for most subbies), 30% for unregistered subcontractors (a penalty rate — registration avoids this), and 0% for subcontractors with gross payment status (must meet turnover, compliance, and on-time payment tests). The deduction applies to the labour element of the payment only — materials, equipment hire, and VAT are excluded.
Contractors must file a monthly return (CIS300) with HMRC by the 19th of each month, covering payments made in the previous tax month (6th to 5th). The return lists each subcontractor paid, their verification number, the gross amount, the amount of materials, and the deduction. Even if you made no payments, you must file a nil return. Late returns attract a £100 penalty for each month late, up to £3,000 after 12 months.
CIS deductions are not a separate tax — they are advance payments of your income tax and National Insurance. If you are a sole trader, offset them against your self-assessment bill. If your deductions exceed your tax bill, you can claim a refund from HMRC. If your subcontracting business is a limited company, offset CIS deductions against your PAYE, NIC, and Corporation Tax liabilities through your company's monthly or quarterly PAYE returns.
GraftG (Pro plan, £24/month) automates both sides. As a subcontractor, toggle CIS in Settings — every invoice shows the deduction on labour and the net payable. As a contractor, text "CIS invoice John, labour £800, materials £300" — GraftG generates a payment and deduction statement PDF, deducting on labour only at the correct rate. CIS REPORT gives tax-year totals ready for your monthly return. GraftG calculates, not advises — always confirm figures with your accountant.
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