If you work in construction as a subcontractor — whether you’re a plumber, electrician, bricklayer, roofer, plasterer, or any other trade — the Construction Industry Scheme (CIS) affects how you get paid and how you pay tax. It’s one of the most misunderstood parts of the UK tax system, and getting it wrong can mean losing 30% of your income to deductions instead of 20%, or waiting months for a tax refund you’re owed.

Here’s the plain-English guide to how CIS works for subcontractors, how to get your deductions back, and how MTD changes things from April 2026.

What Is the Construction Industry Scheme?

The CIS is a tax-collection system for the construction industry. According to HMRC’s CIS 340 guidance, it requires contractors to deduct money from payments made to subcontractors and pay it directly to HMRC. It’s essentially an advance payment of the subcontractor’s tax — similar to how PAYE deducts income tax from an employee’s salary before they receive it.

The scheme exists because construction has historically had high rates of tax non-compliance — cash payments, undeclared income, and workers operating outside the tax system. CIS tackles this by collecting tax at source, before the money reaches the subcontractor.

Who counts as a contractor?

A contractor is anyone who pays subcontractors for construction work. This includes:

  • Main contractors — building firms, developers, construction companies
  • Deemed contractors — businesses whose core activity isn’t construction but who spend more than £3 million on construction in any rolling 12-month period (e.g., a large retailer building new stores)
  • Local authorities and public bodies — for their construction operations

Who counts as a subcontractor?

A subcontractor is anyone who does construction work for a contractor and isn’t an employee. This includes sole traders, partnerships, and limited companies. According to Fernside’s CIS guide, common subcontractor trades include:

  • Builders, bricklayers, scaffolders
  • Plumbers, electricians, gas fitters
  • Roofers, tilers, plasterers
  • Carpenters, joiners
  • Painters and decorators
  • Demolition contractors
  • Plant hire operators (with an operator)

If you’re genuinely employed (PAYE, holiday pay, sick pay, employer’s control over how you work), you’re not a subcontractor — you’re an employee, and CIS doesn’t apply. Employment status is determined by common law, not by what you call yourself.

The Three CIS Deduction Rates

When a contractor pays a subcontractor, they verify the subcontractor’s status with HMRC and apply one of three deduction rates:

Rate Who it applies to What it means
20% Registered (verified) subcontractors Standard rate — 20% deducted from the labour element of your invoice
30% Unregistered or unverified subcontractors Higher rate — applied when HMRC can’t verify your CIS registration
0% Subcontractors with gross payment status No deduction — you receive the full amount and pay your own tax

What the deduction applies to

The deduction is taken from the labour element of your invoice only. According to HMRC’s guidance, the following are excluded from the deduction:

  • Materials — the cost of materials you supply
  • Plant hire — hiring equipment (with or without an operator, depending on the rules)
  • Fuel — fuel costs for equipment
  • VAT — the VAT element of your invoice

For example, if you invoice £1,000 for a job, broken down as £600 labour, £300 materials, and £100 VAT:

  • CIS deduction (20%): 20% of £600 = £120
  • You receive: £1,000 - £100 (VAT) - £120 (CIS) = £780
  • The contractor pays £120 to HMRC and £100 VAT to you (you account for it on your VAT return)

How to Register as a CIS Subcontractor

If you don’t register, contractors must deduct 30% from your payments — which is a significant hit to your cash flow. Registration brings it down to 20%.

According to HMRC’s guidance:

  1. If you already have a UTR (Unique Taxpayer Reference from Self Assessment): register online through your HMRC online account or by calling the CIS helpline on 0300 200 3210

  2. If you don’t have a UTR: register as a new business for Self Assessment and choose “working as a subcontractor” when prompted. You’ll be registered for Self Assessment and CIS at the same time

  3. If you’re a limited company: register your company for Self Assessment first (if not already registered), then register for CIS

Registration is free. Once registered, HMRC sends you a CIS registration letter confirming your UTR and CIS status. You give your UTR to contractors so they can verify you before paying you.

How to Reclaim CIS Deductions

The 20% (or 30%) deducted from your payments is not your final tax bill — it’s an advance payment. You reclaim it through your tax return.

If you’re a sole trader

You declare your CIS deductions on your Self Assessment tax return:

  1. Record your gross income — the full amount you invoiced (before CIS deductions), not just what hit your bank account
  2. Record your expenses — materials, travel, tools, vehicle costs, insurance, etc.
  3. Record your CIS deductions — the total amount contractors deducted and paid to HMRC on your behalf. You’ll find this on the monthly deduction statements contractors are required to give you
  4. Submit your return — HMRC calculates your actual tax liability based on your profit, then sets off the CIS deductions against it

Because the 20% deduction is taken from your gross income before expenses and before your personal allowance, most subcontractors are due a refund. For example:

  • Gross income: £40,000
  • Expenses: £10,000
  • Taxable profit: £30,000
  • Tax due on £30,000 (after personal allowance): approximately £3,486
  • CIS deductions already paid: 20% × £40,000 = £8,000
  • Refund due: approximately £4,514

That refund arrives after you file your Self Assessment — typically within a few weeks, though it can take longer. See our HMRC repayment delays guide if your refund is stuck.

If you’re a limited company

CIS deductions are set off against your PAYE and National Insurance liabilities each month through your payroll. If you have a repayment due by the end of the tax year (5 April), you can apply to HMRC in writing or online to recover the amount. You cannot recover CIS deductions part-way through the year, even if you know it will be a repayment.

Getting CIS Gross Payment Status (0% Deduction)

If you’re tired of having 20% deducted from your payments and waiting months for a refund, you can apply for gross payment status — where the contractor pays you the full amount with no deduction, and you handle your own tax.

The qualifying conditions

According to HMRC’s CIS 340 guidance, to get gross payment status you must:

  1. Turnover test: have at least £30,000 turnover from the labour element of your construction work in the last 12 months

    • Sole traders: £30,000 from your own labour turnover
    • Partnerships and limited companies: £30,000 per director or partner, or £100,000 overall turnover

  2. Compliance test: have a clean tax compliance record — all tax returns filed on time, all tax paid on time, no late filing or late payment penalties in the relevant period

  3. Business test: run your business through a business bank account (not a personal account), and provide construction services in the UK

How to apply

Apply through HMRC’s online service (go to “other services” from “your tax account” section, then “construction industry scheme — subcontractors”) or call the CIS helpline on 0300 200 3210.

HMRC reviews your compliance history and turnover. If approved, you’ll receive a confirmation letter and your status on HMRC’s verification system will change to “gross payment.” Contractors will then pay you in full with no deduction.

Keeping gross status

Gross payment status is not permanent. HMRC reviews it periodically, and you can lose it if you:

  • File a late tax return
  • Pay tax late
  • Receive a tax penalty
  • Stop meeting the turnover threshold

If you lose gross status, you revert to 20% deductions. This is why it’s essential to stay compliant once you have gross status — one late return can cost you it.

How CIS Interacts With MTD

From 6 April 2026, Making Tax Digital for Income Tax applies to sole trader CIS subcontractors with qualifying income over £50,000 (dropping to £30,000 from April 2027 and £20,000 from April 2028).

According to UK Property Accountants’ MTD and CIS analysis and TapTax’s MTD for construction workers guide:

What doesn’t change

  • CIS deductions continue exactly as before — contractors still verify you, deduct 20% (or 0% with gross status), and pay it to HMRC
  • Monthly deduction statements — contractors still give you statements showing what was deducted
  • CIS is still an advance payment of tax — not a final tax liability
  • Refunds still work the same way — you reconcile at the final declaration stage

What does change

  • You send quarterly updates through MTD-compatible software (four times a year, in addition to the contractor’s monthly CIS returns)
  • Your qualifying income is your gross turnover — before expenses and before CIS deductions. If you invoice £58,000, your qualifying income is £58,000 — even though 20% CIS leaves only £46,400 in your bank. This means many CIS subcontractors will be in scope of MTD even though their take-home pay is well below the threshold
  • CIS deductions are reconciled at the final declaration — not in quarterly updates. Your quarterly updates show your income and expenses; the CIS deduction offset happens at year-end

The “double reporting” concern

A common worry is that CIS and MTD create double reporting — the contractor reports your income to HMRC via CIS monthly returns, and you report the same income via MTD quarterly updates. This is true, but it’s not a problem: the two systems serve different purposes. CIS is a tax collection mechanism (collecting 20% at source); MTD is a reporting system (sending quarterly income/expense summaries). The data should match, and if it doesn’t, HMRC’s Connect system may flag it — which is another reason to keep accurate records. See our what triggers an HMRC investigation guide for how Connect works.

What to do

If you’re a CIS subcontractor with qualifying income over £50,000:

  1. Choose MTD-compatible software — see our cheapest MTD software guide for free and low-cost options
  2. Record income gross (before CIS deductions) in your software — not just what hits your bank account
  3. Record CIS deductions separately — your software should have a category for CIS tax suffered
  4. Send quarterly updates — the software handles this automatically from your digital records
  5. Reconcile CIS deductions at the final declaration — this is where your refund is calculated

The Domestic Reverse Charge (VAT)

If you’re VAT-registered and work in construction, there’s an additional complication: the Domestic Reverse Charge (DRC) for VAT. Since March 2021, most business-to-business construction services between VAT-registered businesses in the UK must be accounted for under the reverse charge — meaning the subcontractor doesn’t charge VAT on their invoice, and the contractor accounts for it on their own VAT return.

This doesn’t affect CIS deductions (which are based on the labour element regardless of VAT treatment), but it does affect your cash flow because you no longer receive VAT payments from contractors. If you’re VAT-registered, make sure your invoicing software is set up correctly for the reverse charge.

Common CIS Mistakes to Avoid

1. Not registering — and losing 10% more to deductions

If you don’t register, contractors must deduct 30% instead of 20%. That’s an extra 10% of your labour income sitting with HMRC instead of in your bank account until you file your return and get a refund. Register as soon as you start working as a subcontractor.

2. Recording net income instead of gross

A common bookkeeping error: recording only what hits your bank account (after CIS deductions) as your income, instead of the full invoiced amount. This understates your turnover and can lead to an incorrect tax return. Always record gross income (the full invoice amount) and record CIS deductions separately.

3. Not keeping monthly deduction statements

Contractors are legally required to give you a monthly deduction statement showing how much CIS tax was deducted and paid to HMRC. Keep these — they’re your evidence of tax paid, and you’ll need them to complete your Self Assessment return. If a contractor doesn’t provide them, chase them — it’s a legal requirement.

4. Not applying for gross status when eligible

If your turnover is over £30,000 and you have a clean compliance record, gross payment status means no deductions at all — you receive 100% of your invoice and pay your own tax. This dramatically improves cash flow and eliminates the refund waiting game. Many eligible subcontractors don’t apply because they don’t know it exists.

5. Losing gross status through one late return

Gross payment status requires ongoing compliance. One late tax return or late payment can trigger a review and loss of status. If you have gross status, treat your filing deadlines as non-negotiable.

The Bottom Line

  1. CIS deducts 20% from your labour income (30% if unregistered, 0% with gross status) before you’re paid. It’s an advance tax payment, not your final bill.
  2. Register with HMRC to bring the rate down from 30% to 20%. It’s free and takes minutes.
  3. Record gross income in your books — the full invoiced amount, not what hits your bank after deductions.
  4. Reclaim deductions on your Self Assessment — most subcontractors get a refund because the 20% ignores expenses and your personal allowance.
  5. Apply for gross payment status if your turnover is over £30,000 and you have a clean compliance record — it eliminates deductions entirely.
  6. MTD doesn’t change CIS — deductions, rates, and monthly returns continue as before. But from April 2026, you’ll also send quarterly updates if your qualifying income (gross turnover) is over £50,000.
  7. Keep your monthly deduction statements — they’re your proof of tax paid and you need them for your return.

For the full comparison of self-employed business structures — sole trader, limited company, umbrella, and CIS — see our self-employed business structure hub.

For how to record CIS income in accounting software, see our cheapest MTD software guide. For MTD quarterly update deadlines and the simplified reporting rules, see our MTD quarterly updates guide. If your CIS refund is taking too long, see our HMRC repayment delays guide. For the broader framework of how employment status works and what it means for your NI, expenses, and tax return, see our employment status and tax hub.

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