How the Construction Industry Scheme works in 2026/27 for contractors and subcontractors, the deduction rates, registering, and why CIS refunds are common.
If you work in construction, the Construction Industry Scheme affects how you are paid and taxed, and it often leads to refunds for subcontractors. This guide explains how the Construction Industry Scheme, or CIS, works in 2026/27 for both contractors and subcontractors.
The Construction Industry Scheme is a set of rules for how payments to subcontractors in the building trade are handled for tax. Under CIS, contractors deduct money from a subcontractor payments and pass it to HMRC as an advance towards the subcontractor tax and National Insurance. It applies to most construction work in the UK.
A contractor is a business that pays subcontractors for construction work, and they must register for CIS, verify their subcontractors and make the right deductions. A subcontractor is a business or individual that carries out the work and is paid. Some businesses are both, paying subcontractors while also being paid by others.
Contractors deduct a percentage from a subcontractor labour payments. The standard deduction is 20% for subcontractors registered under CIS. For those who are not registered, the deduction is higher at 30%. Some subcontractors can apply for gross payment status, allowing them to be paid in full with no deduction, and to handle their own tax through their return.
Because CIS deductions are taken from payments before expenses, many subcontractors have too much tax deducted across the year. When they file their Self Assessment return and claim their allowable expenses, the deductions already made often exceed the tax actually due, resulting in a refund. For many in the trade, this annual refund is a significant sum.
Subcontractors register for CIS with HMRC, which is separate from but linked to registering as self employed. Registering means the lower 20% deduction applies rather than 30%, so it is well worth doing. Contractors must register before taking on subcontractors and have monthly reporting duties.
CIS adds extra steps to construction tax, with monthly returns for contractors and refund claims for subcontractors. Keeping good records of your payments, deductions and expenses makes the annual return and any refund straightforward. Many in the trade use an accountant to handle CIS and make sure they reclaim everything they are owed.
A set of HMRC rules where contractors deduct tax from subcontractors payments in the building trade and pass it to HMRC as an advance on their tax.
20% for registered subcontractors and 30% for those who are not registered, with gross payment status available for some to be paid in full.
Because deductions are taken before expenses, the tax deducted across the year often exceeds the actual tax due once expenses are claimed, leading to a refund.
Subcontractors should register so the lower 20% deduction applies, and contractors must register before paying subcontractors and file monthly returns.
The Construction Industry Scheme, usually shortened to CIS, is a special set of tax rules for the building trade. Under it, a contractor who pays a subcontractor for construction work must deduct a slice of the payment and send it to HMRC, where it counts as an advance payment towards the subcontractor's tax and National Insurance. It covers most construction work in the United Kingdom, including building, repairs, decorating and demolition, and it applies to sole traders, partnerships and companies that take on construction work for others.
There are three possible deduction rates. If you are registered with HMRC under CIS as a subcontractor, the contractor deducts 20 per cent from your labour. If you are not registered, the deduction jumps to 30 per cent, which is a strong reason to register. And if you hold what is called gross payment status, the contractor deducts nothing at all and you settle your tax in the normal way through self assessment or your company return. The deduction is only ever taken from the labour part of an invoice, not from the cost of materials.
Suppose you are a registered subcontractor and you invoice a contractor 2,000 pounds for labour plus 500 pounds for materials, a total of 2,500 pounds. The contractor deducts 20 per cent from the 2,000 pounds of labour, which is 400 pounds, and pays it to HMRC on your behalf. You receive 2,100 pounds, made up of 1,600 pounds of labour after deduction plus the full 500 pounds for materials. That 400 pounds is not lost. It sits with HMRC as a credit against the tax you will owe for the year.
Registering for CIS as a subcontractor is straightforward and well worth doing, because it cuts the deduction from 30 per cent to 20 per cent. You register with HMRC, who give you a reference, and the contractor then verifies you before paying, which tells them the correct rate to use. You still need to register as self employed for self assessment separately, because CIS only deals with the deductions, not with your overall tax position.
This is the part that matters most to subcontractors, because the deductions are often more than the tax actually due, which means a refund. If you are a sole trader, you report your full income and expenses on your self assessment return, work out your real tax and National Insurance, and set the CIS deductions already taken against it. Because expenses such as tools, travel, insurance and materials reduce your profit, the tax due is frequently lower than the 20 per cent already taken, so many subcontractors are owed money back each year. If you trade through a company, the deductions are set against the company's payroll and CIS liabilities instead.
Established subcontractors can apply for gross payment status, which means contractors pay them in full with no deduction. To qualify you must pass three tests, broadly that your business is genuinely in construction, that your turnover is above a minimum level, and that your tax affairs are up to date and compliant. Gross status is valuable for cash flow because you keep all of your money during the year and settle the tax later, but it comes with the responsibility of staying fully compliant, because HMRC can withdraw it.
If you are the one paying subcontractors, CIS brings duties of its own. You must register as a contractor, verify each subcontractor with HMRC before you pay them, make the correct deduction, give the subcontractor a deduction statement, and file a CIS return every month showing who you paid and what you deducted. The monthly return is due by the 19th of each month, and there are penalties for filing late, starting at 100 pounds and rising, so it pays to keep on top of it.
The deduction only applies to the labour element, never to the genuine cost of materials the subcontractor supplies. This is why it is important to split labour and materials clearly on every invoice. If materials are not shown separately, the contractor may have to deduct from the whole amount, which costs the subcontractor cash flow they should not lose. Keeping clear invoices protects both sides.
The problems we see most often are subcontractors not registering and suffering the 30 per cent rate needlessly, subcontractors never reclaiming the refunds they are owed because they do not file a proper return, and contractors forgetting the monthly return or getting the verification wrong. None of these are difficult to avoid, and the refunds in particular can be substantial, so it is well worth getting the scheme handled properly.
If you are VAT registered and work in construction, there is a second set of rules to be aware of, the domestic reverse charge for VAT. For most construction services between VAT registered businesses, the customer accounts for the VAT rather than the supplier. In practice this means a VAT registered subcontractor does not charge VAT to a VAT registered contractor, but instead notes on the invoice that the reverse charge applies, and the contractor deals with the VAT. It sits alongside CIS and trips up many in the trade, so it is worth getting both right together.
Good records make CIS far smoother. Subcontractors should keep every payment and deduction statement, because these are the proof of the tax already taken when you claim it back. Contractors should keep verification references, deduction statements and copies of the monthly returns. HMRC can ask to see these, and for a subcontractor a missing statement can mean a delay in getting a refund, so a simple folder or spreadsheet kept up to date pays for itself.
Where a subcontractor trades through a limited company rather than as a sole trader, the deductions cannot come back through a personal tax return. Instead the company sets the CIS suffered against the PAYE and CIS it owes as an employer each month. If the deductions are more than the company owes, the balance can be repaid after the tax year ends. Getting this offset right each month is important for cash flow, and it is an area where mistakes are common.
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