The Construction Industry Scheme (CIS) is one of the most administratively burdensome parts of running a UK construction business — and one of the areas where mistakes are most expensive. HMRC's penalties for non-compliance are significant, and the complexity of the rules catches out businesses and accountants who don't work in this sector every day.
What CIS is and who it applies to
CIS is a HMRC scheme that requires contractors to deduct money from subcontractors' payments and pass it directly to HMRC. The deduction rate is either 20% (for registered subcontractors), 30% (for unregistered subcontractors), or 0% (for those with gross payment status).
You're a contractor under CIS if you pay subcontractors for construction work. You're a subcontractor if you do construction work for a contractor. Many businesses are both.
Monthly CIS returns
If you're a contractor, you must file a monthly CIS return by the 19th of each month, covering payments made to subcontractors in the previous tax month. Even if you made no payments, you must file a nil return (or notify HMRC that you're inactive).
The penalty for a late return is £100, rising to £200, then £300, then 5% of the deductions due — and penalties stack for every month late.
"We've seen businesses hit with thousands of pounds in CIS penalties not because they didn't pay their subcontractors correctly, but because they filed the return two weeks late. It's entirely avoidable with the right systems."
Verifying subcontractors
Before making the first payment to a new subcontractor, you must verify them with HMRC to determine their deduction rate. You cannot simply take their word for it — if you apply the wrong rate, the liability falls on you as the contractor.
The VAT domestic reverse charge
Since March 2021, most construction services between VAT-registered businesses in the supply chain have been subject to the domestic reverse charge — meaning the recipient of the service, not the supplier, accounts for the VAT. This interacts with CIS in ways that confuse even experienced practitioners.
The key point: under reverse charge, the supplier does not charge VAT. The customer accounts for both the output VAT and (where they have full input tax recovery) the input VAT, resulting in a net VAT position of zero for most businesses.
Gross payment status
Gross payment status allows subcontractors to receive payments without CIS deductions — effectively getting the cash earlier and managing their own tax position. To qualify, you need to pass HMRC's compliance and turnover tests. It's worth applying for if your business qualifies, as the cash flow benefit is material.
Runway works with construction businesses across the UK, from sole trader tradespeople to multi-million-pound developers. If you'd like help with your CIS compliance or wider construction accounting, find out more about how we work with the sector.