In the complex landscape of UK construction, the Construction Industry Scheme (CIS) plays a pivotal role in ensuring tax compliance among contractors and subcontractors. Administered by HMRC, the scheme mandates that contractors deduct money from subcontractors’ payments and pass it directly to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance.

For subcontractors, understanding CIS is essential for proper cash flow management and avoiding unexpected tax bills. For contractors, compliance is not optional—incorrectly handling CIS payments can result in heavy fines, reputational damage, and even tax investigations.

This guide from LT Accounting, your trusted accountancy partner in the UK, delves into the critical aspects of CIS payments to subcontractors. We’ll walk you through registration, deductions, reporting obligations, common pitfalls, and how outsourcing can simplify compliance. Whether you’re new to CIS or looking to refine your processes, this comprehensive resource ensures you’re well-informed and HMRC-compliant.

Understanding the CIS Framework

What is the Construction Industry Scheme (CIS)?

The Construction Industry Scheme (CIS) is a set of rules established by HMRC to regulate how payments to subcontractors in the construction industry are handled. The primary purpose of CIS is to reduce tax evasion by ensuring that a portion of subcontractors’ income is paid in advance towards their tax liabilities.

CIS applies to a wide array of construction activities, including:

  • Site preparation

  • Alterations

  • Dismantling

  • Construction

  • Repairs

  • Decorating

  • Demolition

The scheme doesn’t just affect limited companies; sole traders and partnerships are also included. Importantly, CIS is relevant whether you’re working on commercial or domestic projects, so long as the work falls within the remit of “construction operations.”

Who is a Contractor and Who is a Subcontractor?

Under CIS, contractors are defined as businesses or individuals that pay subcontractors for construction work. This includes not only traditional construction firms but also companies from other sectors who spend more than £3 million on construction in a 12-month period.

Subcontractors, on the other hand, are those who carry out construction work for a contractor. A business can be both a contractor and subcontractor—many firms sit in the middle of the supply chain.

Understanding your role is crucial because the responsibilities vary significantly:

  • Contractors must verify subcontractors with HMRC, deduct appropriate tax amounts, and submit monthly returns.

  • Subcontractors need to register with HMRC to benefit from lower deduction rates and ensure their tax is correctly offset.

Why Was CIS Introduced?

CIS was introduced to address the historically high levels of tax evasion in the construction industry, where cash-in-hand payments and transient labour made enforcement difficult. By creating a formalised system where tax is deducted at the source, HMRC significantly increased its ability to collect income tax and National Insurance from self-employed workers.

The system creates a more level playing field for those operating legitimately and provides transparency that can support smoother audits, financing, and business planning.

CIS Registration Requirements

Why Registration Matters

Under the Construction Industry Scheme (CIS), proper registration is crucial for both contractors and subcontractors. For contractors, registration is mandatory before engaging any subcontractors. Subcontractors, while not legally required to register, face higher deduction rates if they remain unregistered.

Contractor Registration Process

Contractors must register with HM Revenue and Customs (HMRC) before hiring subcontractors. The registration process involves:

  • Setting up as a new employer: This step is necessary even if you don’t have employees, as it facilitates the deduction and payment of CIS taxes.

  • Obtaining a PAYE reference number: HMRC will provide this upon successful registration.

Contractors can register online through the HMRC website, ensuring they have all necessary business details and identification information ready.

Subcontractor Registration Process

Subcontractors can register for CIS to benefit from lower deduction rates. The registration process includes:

  • Online registration: The quickest method, requiring a Unique Taxpayer Reference (UTR) and a Government Gateway user ID and password.

  • Simultaneous Self Assessment registration: If you don’t have a UTR, registering as a new business for Self Assessment will also register you for CIS.

Subcontractors can apply for:

  • Net payment status: Standard 20% deduction from payments.

  • Gross payment status: No deductions, but eligibility criteria must be met, including a clean compliance record and a turnover threshold.

Implications of Non-Registration

  • For Contractors: Failing to register before hiring subcontractors can lead to penalties and compliance issues.

  • For Subcontractors: Unregistered subcontractors are subject to a higher deduction rate of 30%, impacting cash flow.

Additionally, providing false information during registration can result in penalties ranging from £1,000 to £3,000, depending on the severity and intent.

Making CIS Payments: What Contractors Need to Know

Under the Construction Industry Scheme (CIS), once a contractor has verified a subcontractor with HMRC and confirmed their status, they must deduct tax from their payments at the applicable rate. The rules around these payments are strict, and compliance is vital to avoid penalties.

CIS Deduction Rates

CIS payments to subcontractors are subject to tax deductions at the following rates:

  • 20% for registered subcontractors

  • 30% for unregistered subcontractors

  • 0% (gross payment status) for eligible subcontractors who meet HMRC’s criteria

Contractors must ensure deductions are calculated on the labour element of an invoice—materials and VAT are excluded from the deduction base.

Verifying Subcontractors with HMRC

Before making any payments, contractors must verify the subcontractor’s CIS status with HMRC. This step confirms:

  • Whether the subcontractor is registered for CIS

  • The deduction rate applicable to the subcontractor

Verification can be done via HMRC’s online CIS portal or commercial CIS software that supports real-time submissions. To verify, contractors need:

  • The subcontractor’s name or business/trading name

  • Their Unique Taxpayer Reference (UTR)

  • Their National Insurance number or company registration number

After verification, HMRC will issue a unique verification number, which must be recorded and referenced in monthly CIS returns.

When and How to Make Deductions

Contractors should:

  1. Calculate CIS deductions only on the labour portion of the invoice.

  2. Exclude materials, VAT, and any travel or accommodation reimbursements.

  3. Deduct the appropriate rate and provide the subcontractor with a CIS Payment and Deduction Statement, which includes:

    • Gross amount before deductions

    • Materials amount

    • Amount deducted

    • Verification number

CIS deductions must then be paid to HMRC by the 22nd of the month following the payment (19th if paying by post).

Record-Keeping Requirements

HMRC mandates that contractors maintain comprehensive CIS records for at least three years, including:

  • Subcontractor verification details

  • CIS Payment and Deduction Statements

  • Invoices showing labour and materials breakdown

  • Records of payments made and deductions withheld

Failure to keep accurate records can lead to investigations, financial penalties, and disqualification from operating under CIS.

CIS Returns and Reporting Obligations

Contractors have a legal obligation to file monthly CIS returns to HMRC, summarising payments made to subcontractors and the deductions applied. These returns are central to HMRC’s compliance monitoring and must be submitted accurately and on time to avoid penalties.

What Is Included in a CIS Return?

A monthly CIS return must include:

  • All payments made to subcontractors in that tax month

  • The gross amount paid before deductions

  • The cost of any materials the subcontractor paid for

  • The amount of tax deducted

You must also declare that:

  • The employment status of subcontractors has been considered (i.e., they are not employees)

  • All subcontractors have been verified with HMRC

This information must be reported even if no subcontractor payments were made during the month—what’s known as a nil return.

Filing Deadlines and Methods

CIS returns must be submitted by the 19th of each month, following the end of the tax month (which runs from the 6th to the 5th of the next month). Returns can be filed using:

  • HMRC’s online CIS service

  • Commercial CIS software

  • An accountant or payroll service provider like LT Accounting

Failure to file on time results in automatic penalties, which escalate over time:

  • £100 – 1 day late

  • £200 – 2 months late

  • £300 or 5% of the CIS deductions (whichever is higher) – 6 months late

  • Additional penalties apply after 12 months

Paying Deductions to HMRC

CIS deductions must be paid to HMRC by the 22nd of the month (if paying electronically) or by the 19th if paying by post. Payments are made through the PAYE system and should include:

  • Employer PAYE reference number

  • Payment period (tax month)

  • Total amount of CIS deductions withheld

Incorrect or late payments can result in interest charges and enforcement actions by HMRC, including the withdrawal of Gross Payment Status from subcontractors.

How LT Accounting Helps with CIS Returns

At LT Accounting, we provide end-to-end CIS return services, including:

  • Subcontractor verification with HMRC

  • Accurate deduction calculations on invoices

  • Timely return filing to avoid penalties

  • Monthly payment summaries for your records

  • Liaison with HMRC on your behalf, ensuring compliance

With dedicated support, you avoid administrative stress and maintain flawless compliance with CIS obligations. Our clients in the UK construction sector rely on us for clear advice, timely submissions, and peace of mind.

Common Mistakes and How to Avoid Them

Despite the clear structure of the Construction Industry Scheme (CIS), many contractors and subcontractors still fall into common compliance traps. These mistakes can lead to penalties, cash flow problems, or even a loss of eligibility for Gross Payment Status. Below, we outline the most typical errors and provide actionable advice on how to avoid them.

1. Misclassifying Workers: Employee vs Subcontractor

One of the most critical errors is treating someone as a subcontractor when they should legally be classified as an employee. HMRC is particularly vigilant about this issue because it directly affects tax and National Insurance liabilities.

How to Avoid:

  • Review HMRC’s employment status for tax (CEST) tool to help assess whether a worker should be paid under CIS or PAYE.

  • If you control how, when, and where the worker performs their job, they may be considered an employee.

  • Consult with LT Accounting for support in conducting a status assessment to avoid future liabilities.

2. Failing to Verify Subcontractors with HMRC

Paying a subcontractor without verifying their status first can lead to applying the incorrect deduction rate or breaching CIS rules altogether.

How to Avoid:

  • Always verify new subcontractors before making any payments.

  • Keep a systemised record of all verification numbers received from HMRC.

  • Use accounting software or services like LT Accounting that automate the verification process to reduce errors.

3. Deducting the Wrong Amount

Incorrect deductions—whether from not separating materials, applying the wrong rate, or miscalculating totals—can result in both overpayments and penalties.

How to Avoid:

4. Submitting Late or Inaccurate CIS Returns

CIS returns are a monthly requirement, and submitting them late—or not at all—is one of the most common triggers for fines from HMRC.

How to Avoid:

  • Set reminders for CIS return deadlines (the 19th of each month).

  • Use cloud-based accounting systems that notify you of upcoming obligations.

  • Rely on LT Accounting to manage and file returns on your behalf with 100% accuracy and timeliness.

5. Not Keeping Proper Records

Poor record-keeping is a common cause of compliance issues. HMRC may audit a contractor’s CIS deductions and payments, and without adequate records, disputes can arise.

How to Avoid:

  • Maintain digital records of invoices, deduction statements, payment receipts, and verification data.

  • Use cloud storage or accounting software to ensure easy access and backup.

  • Let LT Accounting set up and manage your CIS documentation structure for stress-free audits.

6. Overlooking Nil Returns

If no payments are made to subcontractors in a month, a nil return is still required. Forgetting this can trigger the same penalties as late or non-submission.

How to Avoid:

  • Submit a nil return via HMRC’s online CIS service or through your accountant.

  • Automate reminders or engage LT Accounting to monitor and manage return obligations continuously.

Benefits of Outsourcing CIS Management

Managing the Construction Industry Scheme (CIS) in-house can be time-consuming and fraught with compliance risks. From verifying subcontractors to filing returns, staying on top of every requirement is a full-time job—especially for businesses with limited administrative resources.

That’s why many contractors in the UK construction sector choose to outsource their CIS responsibilities to professionals like LT Accounting. Here’s why it’s a smart move:

1. Save Time and Increase Efficiency

CIS compliance involves multiple steps every month: verifying subcontractors, calculating deductions, preparing and filing returns, and keeping accurate records. For businesses without a dedicated accounting team, this can quickly become overwhelming.

With LT Accounting:

  • You’ll free up internal resources to focus on core business operations.

  • We handle all communications with HMRC, saving you hours of paperwork and admin time.

  • Our automated systems ensure that nothing slips through the cracks.

2. Ensure Full Compliance and Avoid Penalties

One of the biggest risks of managing CIS yourself is missing a detail—submitting a return late, misclassifying a worker, or applying the wrong deduction rate can all lead to significant fines.

Our expertise ensures:

  • Correct worker classification (employee vs subcontractor)

  • Accurate verification and deduction handling

  • Timely filing of returns to avoid HMRC penalties

  • Regular reviews and compliance checks to keep you on track

3. Get Expert Advice Tailored to Your Business

Every construction business is unique, and CIS management must adapt to the specifics of your workforce and cash flow.

With LT Accounting, you gain:

  • Access to qualified accountants with in-depth CIS knowledge

  • Strategic guidance on subcontractor contracts and payment structures

  • Insights into optimising cash flow through accurate and timely CIS submissions

4. Improve Financial Accuracy and Cash Flow

Accurate CIS deductions mean subcontractors get the correct amount after tax, and your business avoids paying too much to HMRC. Missteps can disrupt your cash flow and lead to reconciliation issues down the line.

Outsourcing helps by:

  • Keeping your books aligned with your CIS deductions

  • Producing clear, compliant payment and deduction statements

  • Offering cash flow forecasting based on CIS activity

5. Professional Representation in Case of HMRC Audits

HMRC can conduct CIS compliance checks, and having a professional partner means you’re prepared. Should any questions arise, your accountancy firm can speak directly to HMRC on your behalf, with your records and compliance status readily available.

LT Accounting provides:

  • Full audit support and liaison with HMRC

  • Rapid access to all CIS documentation

  • Representation to handle disputes, queries, or clarification requests

Conclusion

Managing CIS payments to subcontractors is a vital responsibility for any UK contractor working within the construction industry. The scheme’s complexity—from registration and verification to deductions and monthly reporting—demands a detailed understanding of HMRC’s requirements. Even minor errors can lead to costly penalties and serious compliance issues.

Here’s what we’ve covered in this guide:

  • The Construction Industry Scheme is designed to ensure subcontractors pay the correct tax, with contractors responsible for verifying workers and deducting the right amount from their payments.

  • Proper registration for CIS is crucial for both contractors and subcontractors, with implications for deduction rates and legal obligations.

  • Contractors must make accurate CIS deductions, only on the labour portion of payments, and keep detailed records to remain compliant.

  • Monthly CIS returns are mandatory, and failing to submit them on time—even for nil returns—can result in steep penalties.

  • We identified common mistakes such as worker misclassification and late filings, offering clear strategies to avoid them.

  • Lastly, we explored the many benefits of outsourcing CIS management, from increased efficiency and compliance to peace of mind during HMRC audits.

At LT Accounting, we specialise in helping UK construction firms handle CIS responsibilities efficiently and accurately. Our expert team offers:

  • End-to-end CIS support

  • Monthly return management

  • Real-time subcontractor verification

  • Expert advice on tax compliance and payroll strategy

Let us take the stress out of CIS management so you can focus on growing your business.