The Construction Industry Scheme (CIS) is one of the most misunderstood areas of UK tax. It sits awkwardly between payroll, self-employment, VAT and corporation tax. It catches out contractors and subcontractors every single year.
If you operate in the construction industry, whether as a sole trader, limited company, contractor, or subcontractor, CIS is not optional. It is a core compliance obligation with real cash flow and tax consequences.
This guide explains what CIS is, who it applies to, how deductions work, and why specialist support matters, particularly in construction where margins are tight and admin errors are costly.
What Is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme is a tax deduction scheme operated by HM Revenue & Customs.
Under CIS, contractors are required to deduct tax from payments made to subcontractors for construction work and pay this tax directly to HMRC.
These deductions are effectively advance payments towards the subcontractor’s tax bill.
CIS applies to most construction work carried out in the UK, including:
- General building and construction
- Alterations, repairs, and decorating
- Civil engineering
- Groundworks and demolition
- Installation of systems such as heating, lighting, and power
Who CIS Applies To
CIS affects both sides of the construction supply chain.
Contractors
You are a contractor if you:
- Pay subcontractors for construction work, or
- Spend more than £3 million on construction over a rolling 12-month period (even if construction is not your main trade)
Contractors must:
- Register for CIS
- Verify subcontractors
- Deduct tax where required
- Submit monthly CIS returns
- Pay deductions to HMRC on time
Subcontractors
You are a subcontractor if you:
- Carry out construction work for a contractor
Subcontractors can be:
- Sole traders
- Partnerships
- Limited companies
Subcontractors may have tax deducted at:
- 20% (registered)
- 30% (not registered)
- 0% (gross payment status)
How CIS Deductions Work
CIS deductions are taken from the labour element only, not from materials, VAT, or certain qualifying costs.
For example:
- Labour: £1,000
- Materials: £300
- CIS deduction at 20%: £200
- Net payment received: £1,100 (plus VAT if applicable)
For subcontractors, these deductions are not an extra tax, but they must be correctly claimed or offset later.
This is where things often fall apart.
Why CIS Causes Problems (Even for Established Businesses)
CIS issues are rarely about ignorance. They are usually about poor systems.
Common problems we see include:
- Incorrect labour vs materials split
- CIS deducted but never reclaimed
- CIS suffered not reflected correctly in accounts
- PAYE and CIS treated as separate silos
- Limited companies missing CIS set-offs against Corporation Tax
- Contractors filing late or inaccurate CIS returns
- Cash flow pressure caused by excessive deductions
Once CIS errors stack up, they don’t quietly resolve themselves. They compound.
CIS for Limited Companies (Often Overlooked)
CIS does not just affect sole traders.
If your construction business operates through a limited company:
- CIS deductions suffered can be offset against PAYE, NIC, and Corporation Tax
- Timing matters, particularly around year end
- Incorrect treatment can distort profitability and cash flow reporting
This is where generalist accounting falls short.
Why Construction Needs Specialist Accounting Support
Construction is not just “another sector”. It has:
- CIS
- VAT complications
- Irregular cash flow
- Retentions
- Project-based profitability
- High compliance risk
Trying to bolt CIS onto a generic bookkeeping setup usually ends badly.
That is why we operate a dedicated construction finance function alongside our main practice, Construction Tax & Finance
Our Specialist Construction Service
At The Accountancy Office, we support construction businesses through our in-house specialist service, Construction Tax & Finance (CTF).
CTF exists for one reason, to handle the complexity of construction properly, not as an afterthought.
Our construction clients receive:
- CIS registration and verification
- Monthly CIS returns and compliance
- Accurate CIS deductions and set-offs
- Bookkeeping structured for construction realities
- VAT support tailored to construction schemes
- Cash flow visibility and forecasting
- Year-end accounts that actually reflect the business
- Ongoing tax planning, not reactive fixes