Overview

You must register as a contractor with the Construction Industry Scheme (CIS) if:

you pay subcontractors to do construction work
your business does not do construction work but you have spent more than £3 million on construction in the 12 months since you made your first payment

You may be a sole trader, in a partnership or own a limited company.

If you’re not sure if you need to register, check who is covered by CIS.

Rules you must follow

You must register for CIS before you take on your first subcontractor.
You must check if you should employ the person instead of subcontracting the work. You may get a penalty if they should be an employee instead.
Check with HM Revenue and Customs (HMRC) that your subcontractors are registered with CIS.
When you pay subcontractors, you’ll usually need to make deductions from their payments and pay the money to HMRC. Deductions count as advance payments towards the subcontractor’s tax and National Insurance bill.
You’ll need to file monthly returns and keep full CIS records – you may get a penalty if you do not.
You must let HMRC know about any changes to your business.

Make deductions and pay subcontractors

When you pay a subcontractor, you usually make some deductions from their payments.

HM Revenue and Customs (HMRC) will tell you how much to deduct from a subcontractor’s payments when you verify them.

The Construction Industry Scheme (CIS) deduction rates are:

20% for registered subcontractors
30% for unregistered subcontractors
0% if the subcontractor has ‘gross payment’ status – for example they do not have deductions made

You must pay these deductions to HMRC – they count as advance payments towards the subcontractor’s tax and National Insurance bill.

How to make a CIS deduction

To make a CIS deduction from a subcontractor’s payment, start with the total (gross) amount of the subcontractor’s invoice.

Take away the amount the subcontractor has paid for:

VAT
equipment which is now unusable (‘consumable stores’)
fuel used, except for travelling
equipment hired for this job (‘plant hire’)
manufacturing or prefabricating materials
materials (only if they paid for them directly)

You can ask the subcontractor for evidence (for example, receipts) that they paid for materials directly. If they do not have any evidence, estimate the cost of the materials.

Finally, deduct the CIS percentage rate (as given to you by HMRC) from the amount left. You’ll be left with the net amount you need to pay the subcontractor.

Paying subcontractors

You usually pay your subcontractors directly. But you can pay them through a third party (such as a relative or debt company) if they ask you to.

If you make deductions, you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.

Example

If the tax month was 6 May to 5 June, you must give the statement by 19 June.

If you’re not making payments

If you know you’re not going to make any payments to subcontractors for up to 6 months, you can ask for your scheme to be made ‘inactive’. HMRC will not send you any returns for that period.

You must file a return when you start paying subcontractors again.

File your monthly returns

You must tell HM Revenue and Customs (HMRC) each month about payments you’ve made to subcontractors through your monthly return.

You can file returns by using:

the HMRC CIS online service
some commercial CIS software

On your return, you must declare that the subcontractors listed are not employees.

You could get a penalty of up to £3,000 if you give the wrong employment status for a subcontractor on your monthly return.

Record keeping

Under the Construction Industry Scheme (CIS), you must keep records of:

the gross amount of each payment invoiced by subcontractors, excluding VAT
any deductions you’ve made from subcontractor payments

If you made deductions, you must also keep records of the costs of materials the subcontractor invoiced you for, excluding VAT.

Keep these details for at least 3 years after the end of the tax year they relate to. HM Revenue and Customs (HMRC) could ask to see your CIS records at any time.

You could be fined up to £3,000 if you cannot show your CIS records when asked by HMRC.