CIS tax for subcontractors — a plain-English guide (UK 2026)

The Construction Industry Scheme (CIS) is one of the most misunderstood parts of running a subcontracting business in the UK. It affects your cash flow every single month, yet many subcontractors are on the wrong deduction rate — or have never registered at all — and are losing hundreds of pounds unnecessarily. This guide explains exactly how CIS works, what you need to do to get the lower 20% deduction rate, and how to reclaim overpaid tax at year-end.

What is CIS and who it applies to

CIS is a tax scheme run by HMRC that applies to payments made from contractors to subcontractors in the construction industry. It was introduced to reduce tax evasion in the sector and works by requiring contractors to deduct money from a subcontractor's payment and send it directly to HMRC. The deducted amount counts as an advance payment toward the subcontractor's tax and National Insurance bill.

CIS applies broadly across construction: groundwork, bricklaying, plastering, plumbing, electrical installation, roofing, scaffolding, demolition and more. It also catches less obvious trades — decorating, joinery, tiling, and even cleaning construction sites after building work. The key question is whether the work is “construction operations” as defined by HMRC. If your contractor is deducting CIS from your invoices, you are almost certainly within scope.

CIS does not apply to all payments. Materials — if separately invoiced and not marked up significantly — are usually excluded from the deduction. Only the labour and plant element of a subcontractor's invoice is subject to CIS. This means it is important to itemise materials clearly on every invoice you send to a contractor.

Registering as a CIS subcontractor

Registering for CIS as a subcontractor is straightforward and takes around 15 minutes online. You need a Government Gateway account and your Unique Taxpayer Reference (UTR) number. If you do not have a UTR yet, you need to register for Self Assessment first — allow 10 working days for your UTR to arrive by post.

The steps to register as a CIS subcontractor are:

• Register for Self Assessment (if not already registered) at gov.uk/register-for-self-assessment
• Wait to receive your UTR number by post (10 working days)
• Log into your Government Gateway account and enrol for CIS
• Give your UTR to every contractor you work for so they can verify your status with HMRC
• HMRC will confirm your registration status to the contractor when they verify you

Once registered, contractors can verify your CIS status online. HMRC will confirm whether you are registered and what deduction rate applies to you. Critically, this is where the 20% vs 30% split is determined.

The 20% vs 30% deduction rate — and how to get 20%

This is the most important section of this guide. HMRC applies two standard deduction rates under CIS:

• 20% for registered subcontractors whose tax affairs are in order
• 30% for unregistered subcontractors, or those whose details cannot be verified

There is also a 0% (gross payment) status available for subcontractors with a strong compliance record and annual turnover above £30,000, but this requires a separate application and ongoing compliance. For most subcontractors, the choice is between 20% and 30%.

What contractors must deduct and when

When a contractor pays a subcontractor, they are legally required to verify the subcontractor with HMRC before making the first payment. HMRC will confirm the subcontractor's registration status and the applicable deduction rate. The contractor then deducts the correct percentage from the labour element of each payment and pays it to HMRC.

The deduction applies to the labour portion of the invoice only. If your invoice clearly separates materials from labour, the contractor should only deduct CIS on the labour line. If your invoice does not separate them, the contractor must deduct CIS on the full amount — another reason to itemise your invoices correctly.

Contractors must give subcontractors a CIS deduction statement (sometimes called a payment and deduction statement) each time a deduction is made. Keep these statements carefully — they are your evidence of the tax already paid when you complete your Self Assessment return.

Filing monthly CIS returns as a contractor

If you use subcontractors yourself, you are a contractor under CIS and must file a monthly CIS return with HMRC by the 19th of each month (or 22nd for electronic payment). The return lists every subcontractor you paid in the previous tax month, the gross amount, the amount deducted, and confirms whether the subcontractor was verified.

Missing a monthly return is subject to a fixed penalty of £100 per return, rising to £200 if it is two months late, £300 or 5% of the deductions (whichever is higher) at four months, and increasing further after six months. HMRC takes CIS return compliance seriously, and the penalties accumulate quickly.

Even if you made no payments to subcontractors in a given month, you must still file a nil return — unless you have told HMRC that you are taking a period of inactivity. Failing to file because there was nothing to report is still a late return in HMRC's view.

Claiming back overpaid CIS at year-end

CIS deductions are advance payments toward your tax bill, not a separate tax. When you complete your Self Assessment return at year-end, the total CIS deducted during the year is offset against your tax liability. If more was deducted than you owe in tax and National Insurance, HMRC refunds the difference.

In practice, many subcontractors are owed a refund — particularly those who have significant allowable business expenses (tools, vehicle costs, protective equipment, materials) that reduce their taxable profit. The higher your legitimate expenses, the lower your actual tax bill, and the larger your CIS refund.

To claim correctly, you need your CIS deduction statements from every contractor who deducted tax from your payments during the year. Add up the total deductions, declare your gross income and allowable expenses on your Self Assessment, and HMRC calculates whether a refund is due. Refunds are usually processed within a few weeks of filing.

CIS and VAT: the domestic reverse charge explained

Since March 2021, most CIS construction services between VAT-registered businesses are subject to the domestic reverse charge (DRC). Under the DRC, the customer (contractor) accounts for VAT rather than the supplier (subcontractor). This means that if you are VAT-registered and supplying construction services to a VAT-registered contractor, you do not add VAT to your invoice — instead, you annotate it with “Reverse charge: customer to account for VAT at 20%”.

The DRC applies to standard-rated and reduced-rated supplies of construction services. It does not apply to supplies to end users (homeowners or businesses who occupy the building), or to businesses not registered for VAT. The DRC and CIS frequently overlap, and invoices need to be correct on both counts.

The most common DRC mistake is subcontractors adding VAT on top of a DRC invoice. This creates a double accounting problem for the contractor and can result in HMRC penalties on both sides. If you are VAT-registered and working for a VAT-registered contractor on CIS construction work, always check whether DRC applies before raising your invoice.

Trade2Base for CIS invoicing

Trade2Base handles CIS invoicing correctly out of the box. When you raise an invoice for a CIS job, you can mark it as subject to CIS and separate labour from materials — so the deduction is applied to the right amount, and your CIS deduction statement is generated automatically for the contractor.

For VAT-registered subcontractors, Trade2Base applies the domestic reverse charge annotation automatically when the job is flagged as CIS and the contractor is VAT-registered. You do not need to remember the exact wording or check HMRC guidance each time — the invoice is correct by default.

At year-end, Trade2Base gives you a CIS summary showing total gross payments received and total CIS deducted across all contractors — exactly the figures your accountant needs for Self Assessment. Combined with your expenses logged in Trade2Base throughout the year, pulling your tax return together becomes straightforward rather than a scramble through old paperwork.