The Construction Industry Scheme (CIS) explained

The Construction Industry Scheme is an HMRC scheme under which contractors deduct money from subcontractors’ payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor’s Income Tax and National Insurance bill.

It covers most construction work to a permanent or temporary building or structure, and civil engineering work such as roads and bridges. GOV.UK lists site preparation, demolition, building, alterations, repairs, installing systems and cleaning after construction among the activities.

You are a contractor if you pay subcontractors for construction work, and a subcontractor if you do construction work for a contractor. GOV.UK adds that a business that does not do construction but spends more than £3 million on it counts as a contractor too.

Many firms are both: a groundworks company might be a subcontractor to a main contractor and a contractor to the trades it brings in. Each role has separate duties.

If you work for a company as an employee, you do not need to register as a subcontractor. Before using subcontractors, GOV.UK also tells contractors to check whether they should employ the person instead, which links back to running PAYE as an employer.

There are three rates: 20% for registered subcontractors, 30% for unregistered subcontractors and 0% for those with gross payment status. HMRC tells the contractor which rate to apply when the contractor verifies the subcontractor.

The deduction is not taken from the whole invoice. A contractor first removes items such as VAT, consumable stores, fuel (except for travelling), plant hire for the job and directly purchased materials with evidence, then applies the percentage to what is left.

Contractors must register for the scheme; subcontractors do not have to, but it costs them money if they do not. Registration is online or by post, and the online route registers you for standard (net) payment status.

For a subcontractor, you will need your legal business name, your Unique Taxpayer Reference (UTR), your VAT number if you have one and your trading start date. If you have no UTR, you can register as a new business for Self Assessment and choose the subcontractor option. Giving false information can lead to fines.

Contractors also need to check with HMRC that each subcontractor is registered before paying them, and registration for the scheme comes through the same employer route covered in our guide to PAYE for employers.

Gross payment status means a subcontractor is paid in full with no deductions, and you apply to HMRC for it. GOV.UK sets three tests: a business test, a compliance test and a turnover test.

• Business test: you do construction work, or provide labour for it, in the UK, and you run a bank account for the business.
• Compliance test: you have paid your tax and National Insurance on time in the past.
• Turnover test: your construction income over the last 12 months, excluding VAT and materials, meets a minimum. For sole traders it is £30,000. Partnerships and companies have per-person or total figures set out on GOV.UK.

With gross payment status you declare your payments as income at the end of the tax year through Self Assessment or a Corporation Tax return, so the tax still has to be paid. The money simply is not taken in advance.

Contractors must file monthly returns and keep full CIS records, and they can be penalised if they do not. GOV.UK says to send each monthly return by the 19th of every month following the last tax month.

• Verify each subcontractor with HMRC before the first payment.
• Make the deduction and pay it over to HMRC.
• Give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.
• File a monthly return by the 19th, or a nil return if you paid no one, or ask HMRC for inactivity status.

For a subcontractor, CIS means you receive less than you invoice, and it can be some time before you recover the difference through your tax return. A 20% deduction on labour is a real hole in the working capital a job needs.

For a contractor, the deductions you withhold are not your money. HMRC treats unpaid CIS deductions seriously: they rank with PAYE as secondary preferential debts if a business fails. Keep them separate from day-to-day cash and include them in your cash flow forecast.

Late-paying main contractors add to the strain. Many construction firms bridge the gap with invoice finance or asset finance for plant, which is covered on our construction industry page.

Capzy is a credit broker, not a lender, and is paid by the lender. We do not arrange CIS registration, gross payment status or refunds, which are matters for HMRC and your accountant.

If CIS deductions and slow payment are squeezing a construction business, you can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.