What is Construction Industry Scheme

PHS Team

29 May, 2025

If you work in construction, whether as a contractor or a subcontractor, you may have heard of the Construction Industry Scheme (CIS). But what exactly is it, and how does it affect you?

The Construction Industry Scheme (CIS) is a scheme that HMRC uses to collect Income Tax from subcontractors who work in the construction industry. This system ensures that the correct amount of tax is paid on construction work.

If you are a contractor, you must register for the CIS. If you are a subcontractor, CIS registration is optional, but doing so means less tax will be deducted from your payments.

In this article, we will explain how the scheme operates, who it applies to, CIS register, and how to avoid common mistakes. Whether you are just starting or want to ensure you are complying correctly, this article will help you understand the CIS clearly.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a set of tax regulations introduced by HMRC to govern how payments are made between contractors and subcontractors within the UK construction industry. 

Under CIS, contractors must deduct an amount from a subcontractor’s payment and pass it directly to HMRC. These deductions serve as advance payments towards the subcontractor’s income tax and National Insurance contributions.

CIS explained:

• Contractors are companies or individuals who employ other workers (subcontractors) to undertake construction work on their behalf. 
• Subcontractors are workers or companies engaged by contractors to perform the construction work.

CIS applies to most types of construction work in the UK, including building, repairs, demolition, and decorating. It affects both sole traders and limited companies operating in the construction industry.

Who Needs to Register for CIS?

Registration under the Construction Industry Scheme (CIS) depends on whether you are a contractor or a subcontractor, or sometimes both. Here’s what you need to know:

Contractors

You must register for CIS if:

• You pay subcontractors to carry out construction work.
• Your business spends more than £3 million on construction work in any 12-month period, even if construction isn’t your main business.

Subcontractors

You don’t have to register, but it’s highly recommended. Why?

• If you register, tax is deducted at 20%.
• If you don’t register, tax is deducted at 30%, which means you take home less money.

If your business both pays subcontractors and receives payments from contractors, you will need to register as both a contractor and a subcontractor under the CIS.

How Does CIS Work?

The Construction Industry Scheme (CIS) operates by requiring contractors to deduct tax from payments made to subcontractors and remit that tax to HMRC. This ensures that tax is paid in advance on construction work and helps to prevent tax evasion.

Here’s a step-by-step breakdown of how it works:

1. Contractor Registers with HMRC

Before engaging subcontractors, contractors must register for CIS with HMRC. They also need to verify each subcontractor’s CIS status using HMRC’s online system.

2. Subcontractor Registers (Optional but Recommended)

Subcontractors may choose to register for the CIS. If registered, only 20% tax will be deducted from their payments. If they do not register, contractors are required to deduct 30%.

3. Contractor Hires Subcontractor

The contractor agrees to pay the subcontractor for construction work, such as building, demolition, repairs, or decorating.

4. Contractor Makes a Deduction

Before making the payment, the contractor:

• Calculates the CIS deduction (usually 20% or 30%)
• Deducts it from the labour portion of the invoice
• Pays the reduced amount to the subcontractor

5. Contractor Sends Deduction to HMRC

The deducted amount is sent to HMRC on behalf of the subcontractor. This counts as advance tax paid.

6. Contractor Submits Monthly CIS Return

Contractors must file a CIS return with HMRC each month, showing:

• Who they paid
• How much they paid
• How much tax was deducted

CIS deduction rates:

Under the Construction Industry Scheme (CIS), contractors must deduct tax from subcontractors’ payments and send it to HMRC. The deduction rate depends on the subcontractor’s registration status with HMRC.

Here are the three possible CIS deduction rates:

Contractors must report monthly to HMRC.

What Construction Work is Covered by CIS?

CIS applies to most construction activities:

• Site preparation
• Building work
• Demolition
• Repairs and decorating

Check the construction information service or the HMRC guide to be sure.

Responsibilities Under CIS

If you are involved in the Construction Industry Scheme (CIS), your obligations will depend on whether you are a contractor, a subcontractor, or both. Failure to fulfil these responsibilities can result in penalties from HMRC, so it is important to remain compliant.

Contractors:

If you pay subcontractors for construction work, you are a contractor under CIS. Your main responsibilities include:

• Registering with HMRC.
• Verifying each subcontractor’s CIS status.
• Deducting tax.
• Paying deductions to HMRC.
• Filing monthly CIS returns.
• Providing payment and deduction statements.

Subcontractors:

If you are paid to carry out construction work for a contractor, you are a subcontractor under CIS. Your key responsibilities are:

• Registering with HMRC.
• Keeping detailed records.
• Filing a Self Assessment tax return.
• Managing your business taxes.

How to Register for CIS

CIS registration is an essential step if you work in the UK construction industry, whether as a contractor or a subcontractor. The process varies depending on your role, but both can be completed online via HMRC.

Contractors:

Steps to register as a contractor:

1. Register as an employer with HMRC.
2. Create a Government Gateway account.
3. Log in to HMRC online services.
4. Provide business details.

Once registered, you’ll be able to:

• Verify subcontractors
• Deduct and pay CIS tax
• Submit monthly CIS returns

Subcontractors:

Steps to register as a subcontractor:

1. Ensure you’re registered as self-employed.
2. Visit HMRC’s CIS registration portal.
3. Log in and choose to register as a subcontractor.
4. Provide your UTR, National Insurance number.

Details needed:

• Business name
• UTR
• NI number or company registration

Whether you are a contractor or a subcontractor, understanding how the scheme operates, who must register, and what your responsibilities entail can help you remain compliant and avoid penalties. 

Although the process may initially appear complicated, registering for CIS and fulfilling your obligations ensures smoother payments, accurate tax deductions, and fewer problems with HMRC. 

How PHS Associates Help You?

If you’re a contractor or subcontractor working in the UK construction industry, registering for the Construction Industry Scheme (CIS) is essential, but the process can be confusing if you’re new to it. That’s where PHS Associates can help. 

Our expert team provides step-by-step support to ensure you register correctly with HMRC, apply the correct CIS deduction rates, and remain compliant with your ongoing obligations. We also assist with monthly CIS returns and accurate record-keeping, helping you avoid penalties and stay focused on your business. Contact us at 0208 8611685  and email info@phs-uk.co.uk.  Get in touch today to register with confidence and focus on building your business.