CIS Explained for UK Builders and Tradesmen

The Construction Industry Scheme (CIS) confuses more UK tradesmen than almost any other tax topic. It is not VAT. It is not income tax. It is a separate withholding mechanism - and if you are working as a subcontractor on any construction job, it almost certainly applies to you.

This guide explains exactly what CIS is, how it works, and what it means for your invoices and take-home pay.

What is the Construction Industry Scheme (CIS)?

CIS is an HMRC scheme that changes how subcontractors in construction get paid. Instead of a subcontractor invoicing a contractor and receiving the full amount, the contractor is required to deduct a percentage from the labour element of the payment and send it directly to HMRC on the subcontractor's behalf.

The deduction is not a tax in itself - it is an advance payment against the subcontractor's income tax and National Insurance bill. At the end of the tax year, the subcontractor reconciles their actual tax liability with their tax return. If the CIS deductions were more than they owed, HMRC refunds the difference.

Who does CIS apply to?

CIS applies to businesses and self-employed individuals working in construction in the UK. Specifically:

• Contractors - businesses that pay subcontractors for construction work, or that do not do construction work themselves but have spent more than £3 million on construction in the 12 months since their first payment
• Subcontractors - self-employed tradesmen who work for contractors on construction jobs

A sole trader plumber, electrician, or builder working on jobs through another company or builder is almost always a subcontractor for CIS purposes. If the person paying you is a contractor registered with HMRC, they must apply CIS deductions to your payment.

CIS does not apply to work you do directly for homeowners. If a homeowner hires you directly and pays you directly, CIS does not apply.

What are the CIS deduction rates?

Under CIS, there are three deduction rates depending on your status with HMRC:

Registering as a CIS subcontractor with HMRC is straightforward and immediately reduces your deduction rate from 30% to 20%. There is no reason not to register.

How do I register as a CIS subcontractor?

You register directly with HMRC. The process differs slightly depending on whether you are a sole trader or a limited company:

Sole traders

The quickest way is online, using your Unique Taxpayer Reference (UTR). If you do not have a UTR yet, register for Self Assessment as a new business and say you are working as a subcontractor - HMRC registers you for both. Depending on your circumstances, you may also need your National Insurance number.

Limited companies

Companies register online through HMRC's business tax account using the company UTR and Companies House registration number.

Once registered, HMRC verifies your status with contractors when they check your details - this is how contractors confirm the correct deduction rate to apply.

What is gross payment status?

Gross payment status means contractors pay you in full, with no CIS deductions taken. You pay your own tax and National Insurance through Self Assessment instead.

To qualify for gross payment status, you must pass HMRC's tests:

• Your business does construction work (or provides labour for it) in the UK, and is run through a bank account
• You have paid your tax and National Insurance on time in the past
• Your construction turnover for the last 12 months, ignoring VAT and materials, is at least £30,000 as a sole trader (partnerships and companies need £30,000 per partner or director, or at least £100,000 for the whole business)

For an established sole trader plumber or electrician with a clean tax record, gross payment status is worth applying for. It improves your cash flow significantly.

How does CIS affect my invoices?

CIS deductions are made from the labour element of your invoice only - not from materials. When you invoice a contractor, you should split your invoice to show:

1. Labour (this is subject to CIS deduction)
2. Materials (this is not subject to CIS deduction)
3. VAT, if you are VAT-registered - but if the contractor is VAT-registered too, the domestic reverse charge usually means you show the VAT without charging it (see below)

Example: You invoice a contractor for a job at £2,000 labour + £500 materials. You are registered for CIS (20% deduction rate) and not VAT-registered:

The contractor sends the £400 CIS deduction to HMRC and gives you a payment and deduction statement within 14 days of the end of each tax month. You use these when completing your Self Assessment tax return.

If you are VAT-registered, see the reverse charge section below - on most jobs for a VAT-registered contractor you still do not add VAT, so you still receive £2,100.

VAT Domestic Reverse Charge for construction - explained

Since 1 March 2021, standard- and reduced-rated construction services supplied by a VAT-registered subcontractor to a VAT-registered contractor, where the payment is reported under CIS, have been subject to the VAT Domestic Reverse Charge (DRC).

DRC changes who accounts for the VAT. Under the normal VAT rules, you charge VAT to your customer and pay it to HMRC. Under DRC, you do not charge VAT to the contractor at all. The contractor accounts for the VAT directly to HMRC in their own VAT return - you are effectively removed from the middle.

When DRC applies

DRC applies when all of these are true:

• You (the subcontractor) are VAT-registered, and so is your customer (the contractor)
• The payment for the work is reported under CIS
• The work is standard-rated (20%) or reduced-rated (5%) - not zero-rated
• Your customer has not told you in writing that they are an end user or intermediary supplier

A main contractor hiring a subcontractor on a commercial fit-out, a refurbishment, or an infrastructure project is the most common DRC scenario. Work on new houses and flats is usually zero-rated, so DRC does not apply there.

When DRC does not apply

DRC does not apply in these situations - charge VAT normally:

• Direct to homeowners: If your customer is not VAT-registered (private individuals are not), DRC cannot apply. Charge VAT at the normal rate.
• End users: A VAT- and CIS-registered business that does not sell the construction services on - a business fitting out its own premises, for example. Once they tell you in writing that they are an end user, they receive normal VAT invoices.
• Intermediary suppliers: A VAT- and CIS-registered business connected to the end user - in the same corporate group, or linked through an interest in the land, such as landlord and tenant - that passes the work on to them. Once they tell you in writing, you charge VAT as normal.
• Zero-rated or exempt supplies: If the supply itself is zero-rated (new residential construction) or exempt, DRC does not apply.

End user declarations

An end user or intermediary supplier must tell you in writing - by letter, by email, or in the contract. Without that, and if your customer is VAT and CIS registered, apply the reverse charge. HMRC's guidance says that if the written notification is not made correctly, the customer is liable for the VAT that should have been accounted for under the reverse charge.

If you are not sure whether your customer is an end user or a contractor, ask before invoicing. A simple written statement from them (“We confirm we are the end user of the construction services supplied on this project”) is enough.

How to invoice under DRC

A DRC invoice is different from a normal VAT invoice in two ways:

1. You do not add VAT to the amount due - the invoice total is the net amount only
2. It must say that the reverse charge applies and that the customer must account for the VAT - HMRC accepts wording such as “Reverse charge: Customer to pay the VAT to HMRC” or “Reverse charge: VAT Act 1994 Section 55A applies”

Show the VAT rate and the amount of VAT the customer has to account for, but keep it out of the amount due. For example:

The contractor then takes the CIS deduction from the labour (£400 at 20%), so £2,100 reaches your account.

The cash flow impact of DRC

Under normal VAT rules, you collected VAT from your customers and held it until your quarterly return - effectively an interest-free float. DRC removes this completely. You receive only the net amount and never handle the VAT at all.

If you were relying on that VAT float for cash flow, DRC changes your working capital position significantly. The contractor does not pay the VAT to you - it adds the VAT to its own VAT return and can usually reclaim it on the same return.

What if you get DRC wrong?

If you charge VAT when DRC should apply (or vice versa), HMRC can assess the correct tax. The penalties depend on whether the error was careless or deliberate. In practice, genuine mistakes are usually corrected through a VAT adjustment. Keep clear records of why you treated each transaction as DRC or non-DRC.

See HMRC's full DRC guidance for the detailed conditions and examples.

How do I claim back CIS deductions?

CIS deductions are reconciled through your annual Self Assessment tax return. When you file your return:

1. Declare your income from all sources, including construction subcontract work
2. Calculate your tax and National Insurance due on that income
3. Offset the CIS deductions your contractors have already paid to HMRC on your behalf
4. Pay the difference (or claim a refund if you overpaid)

Keep all CIS deduction statements your contractors send you. These are your evidence when filing your return.

If your CIS deductions exceed your total tax bill for the year, HMRC will refund the difference. This commonly happens for sole traders, because the deduction is taken from the labour payment before your business costs - van, tools, fuel - or your personal allowance are taken into account.

Key CIS rules to remember

• CIS deductions come off your labour only - not materials
• Register with HMRC as a subcontractor to pay 20% instead of 30%
• Contractors must verify your status with HMRC before paying you
• Your contractor must give you a monthly CIS deduction statement
• CIS and VAT are separate - but between VAT-registered businesses, the domestic reverse charge usually means you do not charge the VAT
• All CIS deductions are reconciled through Self Assessment at year end

For the full picture on UK VAT for tradesmen, see our complete UK VAT guide for sole traders.

Get early access - it's free. PayReady lets you show labour and materials as separate lines on every invoice. If you are VAT-registered and do subcontract work, switch on reverse charge for the job and PayReady leaves the VAT off and adds the HMRC wording. When a contractor pays you short, you can record the CIS they held back against that payment.