The Construction Industry Scheme (CIS) governs payments from contractors to subcontractors in the UK construction sector. It is not a tax in itself; it is a withholding regime that prepays the subcontractor's eventual tax liability. The rules look straightforward and yet CIS-related penalties are among the most common we see in remediation work. The 2024 reforms tightened things further.
Who is in scope
CIS applies to contractors and subcontractors carrying out "construction operations" in the UK. The definition is broad and includes:
- Site preparation, foundations, and demolition.
- Building work and structural work.
- Installations of electrical, plumbing, heating, lighting, and ventilation systems.
- Painting and decorating.
- Cleaning of structures during or after construction.
The scheme also catches "deemed contractors": businesses outside construction that spend more than GBP 3m on construction operations in any rolling 12-month period (raised from GBP 1m in April 2021).
Verification and deduction rates
Before paying a new subcontractor, the contractor must verify them with HMRC. HMRC returns one of three statuses:
- Gross payment: no deduction. Subcontractor pays full liability through self-assessment or corporation tax.
- Standard deduction: 20% withholding from labour element.
- Higher deduction: 30% withholding (where subcontractor cannot be matched or is unverified).
The deduction applies to the labour element only. Materials, plant hire (without operator), and VAT are excluded from the deduction calculation. Mis-allocating "labour vs materials" is one of the most common audit findings.
Monthly returns and the GBP 100 penalty
Contractors must file a CIS300 monthly return by the 19th of each month, covering payments in the previous tax month. Late filing triggers automatic penalties:
- 1 day late: GBP 100.
- 2 months late: further GBP 200.
- 6 months late: further GBP 300 or 5% of deductions (whichever higher).
- 12 months late: further GBP 300 or 5% of deductions, plus higher penalties if the failure is deliberate.
The penalties stack across multiple late months. We have inherited clients owing GBP 4,000+ in stacked CIS penalties from a single year of disorganisation.
The 2024 reform to gross payment status
From 6 April 2024, the compliance test for retaining or obtaining gross payment status was extended to include VAT compliance. Previously, the test covered PAYE / NIC and self-assessment / corporation tax compliance. From April 2024, a VAT default of more than GBP 100 in penalty terms or persistent late VAT returns can trigger removal of gross payment status.
HMRC has been more aggressive about reviewing GPS status since the reform. Several of our clients have faced loss of GPS triggered by a single late VAT return, with significant cash flow impact (suddenly 20% of every invoice is withheld until reinstatement).
Domestic reverse charge for construction services
Since 1 March 2021, most B2B construction services between VAT-registered businesses fall under the domestic reverse charge. The supplier issues an invoice without charging VAT; the customer accounts for both output and input VAT on their own return. This applies to:
- Services within CIS (so essentially all construction operations).
- Between VAT-registered businesses.
- Where the customer is not an end user.
End users (typically property owners or main contractors making supplies to non-construction entities) must notify the supplier in writing of their end-user status. Without this notification, the reverse charge applies by default.
Subcontractor refunds and CIS suffered
Subcontractors operating as sole traders reclaim CIS suffered through self-assessment. Limited company subcontractors offset CIS suffered against their PAYE / NIC liabilities first, then against corporation tax if a surplus remains. Refund claims for surplus CIS must be made after the tax year end through a P35-style submission.
Cash flow planning for subcontractors
20% withholding on every labour invoice is brutal on cash flow. We help subcontractors:
- Apply for gross payment status as soon as compliance history qualifies (three years of clean filing).
- Allocate materials correctly to minimise labour-element deductions.
- Time CIS refund claims to maximise cash receipt.
- Structure as limited companies where the PAYE offset mechanism accelerates refund timing.
How we support construction clients
We act for over 30 construction businesses from sole-trader subcontractors to GBP 15m turnover principals. Payroll and CIS services include verification, monthly CIS300 filing, deduction statements, and GPS application support. VAT advisory covers the reverse charge. Book a CIS review or read our construction sector page.