Demystifying the Construction Industry Scheme (CIS)

The Construction Industry Scheme (CIS) is a crucial aspect of the UK's tax framework, designed to regulate tax payments within the construction industry. Whether you're a contractor or subcontractor, understanding CIS is essential to ensure you meet your tax obligations correctly. In this comprehensive guide, we'll cover key aspects of CIS, including why subcontractor verification is necessary, deduction rates, and when registration is required.


Several cranes towering over a construction site

Why Do I Need to Verify a Subcontractor?

Verifying subcontractors is a fundamental aspect of CIS compliance. When you engage a subcontractor, you become responsible for deducting tax from their payments and sending it to HM Revenue and Customs (HMRC). To avoid any complications or penalties, it’s essential to verify subcontractors with HMRC. Verification ensures that subcontractors are registered under CIS, and it determines the correct tax treatment for their payments. Failing to verify subcontractors can lead to costly consequences, so it’s a step that should never be overlooked.

Rates of Deductions

CIS involves the deduction of tax from payments made to subcontractors. The deduction rates depend on the subcontractor’s status:

  1. Standard Rate (20%): This is the standard deduction rate applied to subcontractors who are registered under CIS.
  2. Higher Rate (30%): The higher deduction rate is applied when subcontractors are not registered under CIS.
  3. No Deduction (0%): In some cases, no tax deduction is required. This typically applies to subcontractors who have obtained gross payment status.

Understanding the correct deduction rate is crucial to avoid over or under-deducting tax, which can lead to complications for both contractors and subcontractors.

When You Need to Register

Determining when you need to register under CIS is vital to ensure compliance. Here are the key points to consider:

  1. Contractor Registration: If your business pays subcontractors for construction work and your annual spending on construction operations exceeds £3 million, you are required to register as a contractor under CIS.
  2. Subcontractor Registration: Subcontractors are not obliged to register under CIS, but doing so can be advantageous. Registering as a subcontractor allows you to benefit from the lower deduction rate of 20% instead of the higher rate of 30%.
  3. Gross Payment Status: Subcontractors can apply for gross payment status if they meet certain criteria. This status exempts them from CIS deductions, enabling them to receive their full payment and settle their tax liability directly with HMRC.

In conclusion, CIS is a vital component of the construction industry’s taxation system. Contractors and subcontractors must understand their responsibilities, including verifying subcontractors, applying the correct deduction rates, and registering when necessary. Compliance with CIS ensures smooth operations within the construction sector and helps avoid potential penalties or disputes with HMRC.

If you have questions or need assistance with CIS, do not hesitate to get in touch with us.


Let's discuss your payroll needs