CIS Explained: What Contractors and Subcontractors Need to Know

If you’re operating in the construction industry in the UK — whether you’re building houses, managing developments, or doing renovation work — you’re likely affected by the Construction Industry Scheme (CIS).

Yet despite its importance, many contractors and subcontractors don’t fully understand how CIS works, how it affects their cash flow, and how to stay compliant with HMRC. In this post, we break it down in plain English.

What is CIS?

The Construction Industry Scheme is a set of rules introduced by HMRC that governs how payments are made from contractors to subcontractors. It ensures that tax is deducted at source from payments for construction work.

These deductions go to HMRC and count as advance payments toward the subcontractor’s tax and National Insurance bill.

Who Needs to Register?

Contractors: If you pay other people or businesses for construction work, you must register as a contractor with HMRC.
Subcontractors: If you’re being paid for construction work, you should register as a subcontractor — otherwise, you’ll suffer a higher deduction rate.

✅ Registered subcontractors have tax deducted at 20%
🚫 Unregistered subcontractors are taxed at 30%

What Kind of Work Is Covered?

CIS covers most construction activities, including:

Site preparation
Demolition
Building work (including conversions and extensions)
Repairs and decorating
Installation of systems (e.g. heating, lighting)

It applies whether the work is on commercial buildings, residential property, or civil engineering projects.

It does NOT include: architectural design, surveying, carpet fitting, or manufacturing of materials off-site.

How CIS Works in Practice

Let’s say a contractor owes a subcontractor £1,000 for labour.

If the subcontractor is registered, the contractor deducts £200 and pays £800 to the subcontractor.
The £200 goes directly to HMRC on the subcontractor’s behalf.

The subcontractor can then offset this deduction against their year-end tax return.

Why It’s Important to Get It Right

Mistakes with CIS can be expensive. Failing to register, report or pay on time can lead to:

Penalties from HMRC
Delays in payments
Poor relationships between contractor and subcontractor
Cash flow issues — particularly for smaller trades

Contractors must:

Verify subcontractors with HMRC
Deduct the correct amount
Submit monthly CIS returns
Provide payment and deduction statements

How AXT Accountants Can Help

We manage CIS compliance for contractors and subcontractors across Cheshire and beyond. From verifying subcontractors to submitting returns and reconciling deductions, we ensure you’re always compliant — and never overpaying.

If you’re in the construction industry and want peace of mind with CIS, speak to us today. Chat with us online or pick up the phone! 0161 989 9560.