Updated October 2026. Construction Industry Scheme (CIS) deductions depend on the subcontractor’s HMRC verification status and on which parts of an invoice form the amount liable to deduction. Applying a flat percentage to everything on an invoice, or excluding costs without evidence, can create incorrect returns and disputes. Here is a practical UK contractor and subcontractor guide.
Who operates the Construction Industry Scheme?
Contractors carrying out qualifying construction operations must normally register for CIS, verify subcontractors and make deductions where HMRC requires them. Construction work can include building, alterations, repairs, decorating, site preparation and more. Not every service is within scope, and employee payroll is a separate system. See HMRC’s CIS overview.
CIS deduction rates for 2026
| Subcontractor status after HMRC verification | Typical deduction rate |
|---|---|
| Verified and registered for CIS | 20% |
| Not registered or not verified as required | 30% |
| HMRC-approved gross-payment status | 0% |
The contractor must use the rate HMRC gives on verification; it should not guess the status based on the wording of a subcontractor’s invoice. CIS withheld amounts count towards the subcontractor’s tax and National Insurance position, rather than being an additional tax on the customer.
How to calculate the amount liable to CIS
Start with the subcontractor’s gross invoice and identify the amount before VAT. Under the applicable rules, subtract qualifying costs the subcontractor actually incurred directly for materials, and allowable categories such as certain consumable stores, plant hire and fuel used for the work (but not travelling fuel). Do not assume that travel, subsistence, general overhead or unsupported material allowances can all be excluded. HMRC may request evidence for material purchases.
Illustrative 20% calculation
A registered subcontractor invoices £1,000 before any VAT, including £300 of qualifying materials they bought directly for that contract. Subject to verification and evidence, the CIS deduction base is £700 and 20% of this is £140. The payment before VAT is therefore £860. Any VAT treatment is a separate question, including whether the domestic reverse charge applies. See HMRC’s official calculation steps.
What evidence should the contractor and subcontractor keep?
- HMRC subcontractor verification record, business name and tax reference.
- Subcontract and invoices with work, labour and qualifying material costs separately explained.
- Proof of material purchases made directly by the subcontractor where relevant.
- VAT treatment, including whether any domestic reverse-charge rule applies.
- Monthly CIS returns, tax payments and subcontractor payment-and-deduction statements.
When are CIS returns and deduction statements due?
CIS operates on tax months running from the 6th to the 5th. Contractors normally submit monthly CIS returns within 14 days of the end of each tax month, and must give a subcontractor payment-and-deduction statement within that same 14-day period when making deductions. Keep the deduction records separate from payroll while reconciling the business’s tax balances. HMRC’s CIS 340 guidance gives the detailed rules and examples.
Common mistakes to avoid
- Not verifying: do not use the 20% rate automatically for an unknown subcontractor.
- Deducting from VAT: work from the properly calculated amount excluding VAT and apply the separate VAT rules correctly.
- Overestimating materials: qualifying direct material purchases need a proper basis; the business cannot simply deduct an arbitrary materials percentage.
- Confusing status: CIS treatment does not by itself settle employment status for tax or employment law.
- Missing paperwork: a correct payment without the proper return or deduction statement may still leave a compliance issue.
Get help with CIS accounting
For a contractor managing multiple subcontractors, have your accountant review verification, material evidence, CIS returns, payroll coordination, domestic reverse-charge VAT and monthly job-cost reporting together. Our construction accountants in London can discuss the required scope; book a call with sample invoice details and your current CIS process. This guide is general information and does not establish the right treatment for an individual contract.
