What CIS is and who it covers
The Construction Industry Scheme sets the rules for how contractors pay subcontractors for construction work in the UK. HMRC’s CIS 340 guide explains the principle: every payment must take account of the subcontractor’s tax status, which may require the contractor to make a deduction and pay it to HMRC. For subcontractors, these deductions are advance payments towards their tax and National Insurance.
The scheme covers work such as site preparation, alterations, dismantling, construction, repairs, decorating and demolition, carried out by companies, partnerships or self-employed individuals. It does not apply to employees.
- Contractors are businesses that pay subcontractors for construction work: building firms, but also government departments, local authorities and other clients.
- Deemed contractors are other businesses that spent more than £3 million on construction in the previous 12 months.
- Subcontractors carry out construction work for a contractor. Many firms are both.
- Private householders are not contractors, so work for them is outside CIS.
A business based outside the UK that does construction work in the UK is within the scheme and must register.
Registration and verification
Contractors must register before paying their first subcontractor, by following the process for setting up as a new employer. Subcontractors should register when they are about to start construction work; a sole trader, partnership or company with a UTR can do it online.
Before paying a subcontractor, the contractor may have to verify them with HMRC, online or through commercial CIS software. Verification is not needed if the contractor included that subcontractor on a return in the current or the two previous tax years. HMRC then confirms one of three outcomes:
| Status | Deduction | When |
|---|---|---|
| Gross payment status | None | The subcontractor has passed HMRC’s tests |
| Registered (net payment) | 20% | The subcontractor is registered for CIS |
| Unregistered or unverified | 30% | HMRC has no record or cannot verify the details |
Deductions, statements and monthly returns
The deduction is calculated on the labour element only. The contractor starts from the payment excluding any VAT charged by a VAT-registered subcontractor, then removes what the subcontractor actually paid for materials, consumable stores, fuel (except fuel for travelling), plant hire and prefabrication. Travel and subsistence paid to the subcontractor stay in the amount subject to deduction.
The CIS tax month runs from the 6th of one month to the 5th of the next. For each tax month, the contractor must:
- give each subcontractor who suffered a deduction a payment and deduction statement by the 19th;
- send HMRC a monthly return of all payments to subcontractors, gross or net, to reach HMRC by the 19th;
- pay the deductions by the 19th, or by the 22nd when paying electronically. Contractors whose average monthly payments to HMRC are below £1,500 may pay quarterly, but still file monthly.
A late return costs £100 the day after the deadline, a further £200 after 2 months, then the greater of £300 or 5% of the deductions after 6 months, and again after 12 months. From 6 April 2026, mainstream contractors who paid no subcontractors in a month must again file a nil return or tell HMRC they are inactive, or a penalty is due. Also from that date, payments to local authorities and public bodies acting as subcontractors are outside CIS.
Gross payment status
A subcontractor with gross payment status is paid in full and settles tax at the end of the year. To qualify, the business must show that it has paid tax and National Insurance on time in the past, that it does construction work (or provides labour for it) in the UK and that it runs through a bank account. It must also pass a turnover test on the last 12 months, ignoring VAT and materials:
| Business | Minimum construction turnover |
|---|---|
| Sole trader | £30,000 |
| Partnership | £30,000 per partner, or at least £100,000 for the partnership |
| Company | £30,000 per director, or at least £100,000 for the company |
| Company controlled by 5 people or fewer | £30,000 for each of them |
HMRC reviews the status every year; late returns or payments beyond a small allowance can lead to withdrawal with 90 days’ notice and a 30-day window to appeal. After a cancellation, the business must normally wait a year before reapplying. HMRC’s policy paper of 26 November 2025 adds that, from 6 April 2026, HMRC can remove gross payment status immediately where a business knew or should have known a payment was connected to fraud, charge a 30% penalty that can fall on the business or its officers, and bar it from reapplying for 5 years.
The VAT domestic reverse charge
Since 1 March 2021, most supplies of building and construction services at the standard or reduced rate, between UK VAT-registered businesses and reported within CIS, use the domestic reverse charge. The supplier does not charge VAT; the customer accounts for it on its own VAT return. The services covered match the CIS list of construction operations: building, altering, repairing and demolishing; installing heating, lighting, drainage or fire protection; painting and decorating; and preparatory work such as site clearance, scaffolding and landscaping.
The reverse charge does not apply to the professional work of architects and surveyors, manufacturing or delivering materials on their own, installing security systems, seating, blinds or shutters, signwriting, or artworks. Nor does it apply to:
- end users: VAT and CIS-registered businesses that do not make onward supplies of the construction services, once they tell the supplier so in writing;
- intermediary suppliers: businesses connected or linked to an end user, such as a landlord and tenant or companies in the same group, which also notify in writing;
- customers who are not VAT registered, including private householders;
- supplies of staff by employment businesses, as opposed to labour-only subcontractors, who are covered.
If a business customer is VAT and CIS-registered and has not confirmed end user status, HMRC says the supplier should apply the reverse charge. Where reverse charge services are 5% or less of a single supply’s value, agreed at the start of the contract, the 5% disregard allows normal VAT rules.
What the invoice must say
A reverse charge invoice shows all the usual details of a VAT invoice, states that the reverse charge applies and that the customer must account for the VAT, and shows the VAT amount (or rate) without adding it to the total. The VAT Regulations 1995 require the reference “reverse charge”; HMRC’s examples include “Customer to pay the VAT to HMRC” and “VAT Act 1994 Section 55A applies”.
Worked example: a £6,000 subcontract invoice
A plastering subcontractor, registered for VAT and for CIS at the standard rate, invoices a VAT-registered main contractor for work on an office refurbishment: £5,000 of labour and £1,000 of materials it bought directly. The contractor is not an end user, because it re-supplies the work to its client.
| Step | Amount |
|---|---|
| Invoice total, no VAT charged (reverse charge) | £6,000 |
| Less materials paid by the subcontractor | £1,000 |
| Amount subject to CIS deduction | £5,000 |
| CIS deduction at 20%, paid to HMRC by the contractor | £1,000 |
| Net payment to the subcontractor | £5,000 |
| VAT the contractor accounts for under the reverse charge (20% of £6,000) | £1,200 |
The invoice says “Reverse charge: customer to pay the VAT to HMRC” and shows £1,200 at 20%. The contractor accounts for that VAT on its own VAT return. The subcontractor receives no VAT, which HMRC notes may mean regular repayment claims. If the contractor pays late, our guide to statutory late payment interest explains what can be claimed.
Frequently asked questions
What are the CIS deduction rates?
20% for subcontractors registered for CIS, 30% for those not registered or not verified, and no deduction for those with gross payment status. Deductions apply only to the labour part of the payment.
When are CIS monthly returns due?
Within 14 days of the end of the tax month, so by the 19th. Deductions must be paid by the 19th, or the 22nd if you pay electronically. A late return triggers a £100 penalty.
Do I need to file a nil CIS return?
From 6 April 2026, mainstream contractors who paid no subcontractors in a tax month must file a nil return or notify HMRC of inactivity by the 19th, or a penalty is due.
Does the reverse charge apply to work for a homeowner?
No. Private householders are not VAT registered, so normal VAT rules apply to the contractor’s invoice. Subcontractors working for that contractor may still use the reverse charge.
How does a client avoid the reverse charge as an end user?
By telling the supplier in writing. HMRC suggests wording stating that the business is an end user for the purposes of section 55A VAT Act 1994 and asking for a normal VAT invoice.
Sources
- HMRC, Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340) (gov.uk)
- GOV.UK, What you must do as a CIS subcontractor (gov.uk)
- HMRC policy paper, Construction Industry Scheme: tackling fraud (gov.uk)
- HMRC, Check when you must use the VAT domestic reverse charge for building and construction services (gov.uk)
- HMRC, VAT domestic reverse charge technical guide (gov.uk)
This article summarises the official texts to help you get organised. It is not a substitute for personalised advice from your accountant.