Have you ever paid a bricklayer, electrician, or groundworker and wondered whether HMRC expects you to take a cut before they see a penny? If so, you have stumbled into the Construction Industry Scheme (CIS), a withholding tax system that places significant compliance duties on anyone hiring subcontractors for construction work.
CIS applies across the sector, from a two-person sole-trader roofing business to a manufacturing SME that occasionally hires contractors for a factory extension. If your business pays subcontractors for labour-only contracts, repairs, site preparation, or demolition, HMRC deems you a contractor. You must register for CIS, verify each subcontractor before their first payment, deduct the correct tax rate, and file monthly returns. The rules catch many unsuspecting businesses: a hospitality operator fitting out a new kitchen through a third-party builder is not caught, but a property developer using day-rate labourers almost certainly is.
The 2025/26 deduction rates are fixed: 20% for registered subcontractors who provide their Unique Taxpayer Reference (UTR) and National Insurance number, and 30% for unregistered subcontractors who cannot verify their status. Gross payment status, where no deduction is made, is reserved for subcontractors who pass strict turnover and compliance tests. You must issue a CIS payment statement to each subcontractor within 14 days of the tax month end. A common pitfall is deducting tax from the VAT element of an invoice. You must strip out VAT before applying the 20% or 30% rate.
Consider a software company that decides to refurbish its office using a sole-trader carpenter. The carpenter invoices £5,000 plus £1,000 VAT. The contractor deducts 20% from the £5,000 labour element, so £1,000 goes to HMRC and the carpenter receives £4,000 net. The contractor must then file a CIS return by the 14th of the following month and pay the £1,000 to HMRC by the 22nd (19th for electronic payments). Late filing triggers penalties starting at £100 per 50 subcontractors per month, and HMRC can charge interest on late payments.
CIS interacts directly with your payroll. If you employ construction workers on PAYE, CIS deductions do not apply to them, only to subcontractors. You must also consider the apprenticeship levy (0.5% of pay bills over £3 million) and off-payroll working rules (IR35) if you engage limited company contractors. A separate trap: if you are a contractor and also a subcontractor on another job, you must register for CIS in both capacities and reconcile the deductions on your annual Self Assessment tax return.
For any UK business owner who engages construction tradespeople, the priority is registering for CIS before making the first payment. HMRC can backdate penalties if you fail to register. Getting CIS right protects your business from unexpected tax bills, keeps subcontractors compliant with their own tax affairs, and reduces the risk of a compliance check that could uncover wider payroll errors.