The Construction Industry Scheme: 20, 30 or nothing

If a contractor pays you for construction work and holds back 20 per cent, nothing has gone wrong. That money is not a fee, a fine or a retention. It is tax paid over to HMRC in your name, against the bill you will settle at the end of the year. The Construction Industry Scheme is a collection mechanism, not a separate tax.

Knowing that changes what you do about it. You do not argue the deduction with the contractor. You make sure the deduction statement is right, and you claim the money back.

Where the scheme comes from

CIS sits in Part 3, Chapter 3 of the Finance Act 2004, sections 57 to 77. Two sections carry most of the weight.

Section 61(1) is the deduction itself:

On making a contract payment the contractor must deduct from it a sum equal to the relevant percentage of so much of the payment as is not shown to represent the direct cost to the sub-contractor of materials used or to be used in carrying out the construction operations to which the contract relates.

Section 74 defines what counts as a construction operation. Subsection (2) brings in building, alteration, repair, demolition, roadworks, power lines, the installation of heating, lighting, power, drainage and sanitation, internal cleaning carried out during construction, painting and decorating, and preparatory work such as site clearance and excavation.

Subsection (3) takes work back out again. Drilling for oil or natural gas. Mineral extraction. Manufacturing building components away from site. Professional work by architects and surveyors. Artistic works. Signwriting. Installing security systems. HMRC's public guidance adds the ones trades actually ask about: carpet fitting, delivering materials, and hiring scaffolding where no labour comes with it.

Who is a contractor, who is a subcontractor

HMRC's CIS 340 guidance defines a contractor as "a business or other concern that pays subcontractors for construction work", and a subcontractor as "a person or body that has agreed to carry out construction operations for a contractor".

Most small firms are both. You are a subcontractor when the main contractor pays you, and a contractor when you pay the labourer who worked beside you for three days. The second role is the one that gets forgotten, and it is the one with the deadlines.

None of that is a question about employment status. Registering someone under the scheme, or deducting the right percentage from them, does not make them self-employed — a separate test decides that, and it is set out in subcontractor or employee: why CIS registration decides nothing.

There is a third category that catches people who never thought of themselves as being in construction at all. A deemed contractor is a business outside mainstream construction whose "cumulative expenditure on construction operations exceeds £3 million within the previous 12 month period". It is a rolling test: once you are in, you stay in until spending over the previous twelve months has "been less than £3 million".

Deemed contractors get one useful relief. CIS 340 allows them to leave out "small contracts for construction operations amounting to less than £1,000, excluding VAT and the cost of materials", with HMRC's agreement.

Why 20, why 30, why nothing

The rate is not the contractor's choice. Article 2 of the Finance Act 2004, Section 61(2), (Relevant Percentage) Order 2007 sets it:

HMRC's own manual CISR71020 records the same two figures for matched and unmatched subcontractors from 6 April 2007 onwards.

The 30 per cent rate is not a penalty for bad behaviour. It is what happens when HMRC cannot match you. Registration is free, and moving from 30 to 20 on a 4,000 pound labour invoice is 400 pounds that stays in your account instead of sitting with HMRC until your tax return.

Verification is the contractor's job, not yours. Under CIS 340 a contractor must verify a subcontractor unless "they last included that subcontractor on a return in the current or 2 previous tax years".

What is never deducted

Three things sit outside the deduction and they are worth putting on the invoice as separate lines, because that is how you show them:

• Materials. Section 61(1) excludes "the direct cost to the sub-contractor of materials used or to be used". Direct cost means what you paid, not what you are charging.
• VAT. Never part of the CIS calculation.
• The CITB levy, where it applies, and certain plant costs.

An invoice that says "supply and fit, 3,600 pounds" invites a deduction on the whole 3,600 pounds. An invoice that separates 1,400 pounds of materials from 2,200 pounds of labour puts the deduction where it belongs: 440 pounds instead of 720 pounds withheld.

Gross payment status

Gross payment status means the contractor pays you in full and you settle your own tax later. It is granted under sections 63 to 65 of the Finance Act 2004, subject to the tests in Schedule 11: a business test, a turnover test and a compliance test over the qualifying period of the previous twelve months. The exact turnover figures, and the compliance tolerance that actually costs people the status, are set out in the three tests and the £30,000.

Two things changed on 6 April 2024:

1. VAT joined the compliance test. Subcontractors now have to show compliance with their VAT obligations to be granted, and to keep, gross payment status. Regulations set out which minor VAT failures can be overlooked, and businesses that are not VAT registered are not refused on that ground.
2. HMRC's power to cancel immediately widened, to cases where it has reasonable grounds to suspect fraud involving VAT, Corporation Tax, Income Tax or PAYE.

The same reform, made by the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024, took most landlord-to-tenant payments out of CIS. If your work is paid for by a landlord's contribution to a tenant's fit-out, that payment is now usually outside the scheme.

The 19th, every month

If you pay subcontractors, you file a monthly return. HMRC's guidance is unambiguous: "Send your monthly returns to HMRC by the 19th of every month following the last tax month." The tax month ends on the 5th, so you have fourteen days.

Paid nobody that month? You still file, showing zero, unless you have told HMRC you are temporarily inactive.

The penalties are automatic and they stack:

Beyond twelve months a further penalty of up to 3,000 pounds or 100 per cent of the deductions can apply.

Note what the six and twelve month penalties key off: the deductions on the return, not the tax you owe. A nil return filed a year late still costs 300 pounds.

What to do this week

1. Register, if you take payments for construction work and have not. It moves you from 30 to 20 per cent.
2. Split materials from labour on every invoice. The exclusion in section 61(1) only helps if the split is shown.
3. Keep the deduction statements. They are your evidence that the tax was paid. Without them you are claiming credit for money you cannot prove left your invoice.
4. Put the 19th in the calendar as a monthly recurring task, not as something you remember when the contractor's return arrives.
5. If you pay anyone for construction work, even once, you are a contractor for that payment. Verify them before you pay.

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Position as at 29 August 2026. This article describes the law and is not tax advice. Rates and thresholds are set by statutory instrument and can change; the sources below carry the dates on which they were checked.

What Zirko does here: it keeps materials and labour as separate lines on quotes and invoices, so the CIS-relevant amount is visible before the invoice goes out rather than argued about afterwards. Zirko does not file CIS returns and does not verify subcontractors — that happens in HMRC's own systems, and we are not going to pretend otherwise.