If you work in construction and are paid by a contractor rather than employed by them, the Construction Industry Scheme governs how you are paid and how much tax comes off before you see the money. It was designed to stop tax leaking from an industry with a lot of cash and a lot of movement, and it works by making contractors collect tax in advance. For a subcontractor the consequences are a smaller invoice payment, a refund at the year end, and a set of rules that reward being organised. This guide explains the scheme from the subcontractor's side.
What the scheme covers
CIS applies to payments from a contractor to a subcontractor for construction operations: site preparation, building, alteration, repair, extension, demolition, installation of heating, lighting, power, water and ventilation systems, painting and decorating, and cleaning of buildings during construction. It does not apply to architecture, surveying, scaffolding hire without labour, carpet fitting, the delivery of materials, or work on a homeowner's own property paid for by the homeowner. A mixed contract that includes any construction operation falls within the scheme in full.
A contractor is any business that pays subcontractors for construction work, plus any business outside construction whose average annual spend on construction exceeds £3 million. A subcontractor is anyone paid by a contractor for construction work: a sole trader, a partnership or a limited company. Many construction businesses are both.
Registering
Subcontractors are not legally required to register, but the consequence of not doing so is a 30% deduction instead of 20%. Registration requires a Unique Taxpayer Reference, so a new sole trader registers for Self Assessment first and for CIS second; our UTR and CIS package does both for £69. A limited company registers using its Corporation Tax UTR. Once registered, HMRC confirms the 20% rate to any contractor who verifies you.
Verification and deductions
Before paying you for the first time, a contractor verifies you with HMRC online, giving your UTR and other details, and HMRC tells them which rate to deduct: 20% for a registered subcontractor, 30% for an unregistered one, or 0% for a subcontractor with gross payment status. The deduction applies to the labour element of your invoice only. Materials, plant hire and VAT are excluded, which is why your invoices should separate labour from materials clearly. The contractor pays the deduction to HMRC, files a monthly return by the 19th, and must give you a deduction statement each month showing what was deducted.
Keep every deduction statement. They are the evidence for your refund, and missing statements are the commonest reason refunds are delayed. If a contractor does not give you one, ask in writing; they are required to provide it.
Why there is usually a refund
Deductions are 20% of your labour turnover. Tax is charged on your profit after expenses and after the £12,570 personal allowance, at 20% in the basic band, with Class 4 National Insurance at 6% on profit over £12,570. For most subcontractors earning under about £45,000 the deductions exceed the tax and National Insurance actually due, often by several thousand pounds, and the difference is repaid after the Self Assessment return is filed.
The return is where the refund is calculated. It needs your total income from deduction statements and any other work, your allowable expenses, and the deductions suffered. Expenses that construction trades commonly miss include tools and equipment, protective clothing and boots, travel between sites, van costs or mileage, a proportion of phone and home costs for administration, insurance, and accountancy. Claiming them properly increases the refund.
Timing
The tax year ends on 5 April and the return can be filed from 6 April. HMRC processes CIS refunds in the order received, and filing in April or May typically brings the repayment within two to six weeks, against months in the January rush. The deadline is 31 January, but there is no reason to wait for it when money is owed to you. Returns for up to four earlier years can still be filed to reclaim deductions, and HMRC offsets refunds against any late-filing penalties.
Limited company subcontractors
A company's deductions are not reclaimed through Self Assessment. Instead the company offsets them each month against its own PAYE and CIS liabilities through the Employer Payment Summary, and any balance remaining at the end of the tax year is reclaimed from HMRC in writing or set against Corporation Tax. This means a company subcontractor must run a PAYE scheme even if the director is the only employee, and must keep the monthly offsets reconciled. Our CIS and payroll bundle at £49 a month does this.
Gross payment status
The way out of deductions is gross payment status: contractors pay you in full and you settle your tax through Self Assessment or Corporation Tax in the normal way. For an established business the cash-flow effect is transformative. HMRC applies three tests. The turnover test requires net construction turnover, excluding VAT and materials, of at least £30,000 in the previous twelve months for a sole trader, £30,000 per partner or per director for partnerships and companies, or £100,000 in total for partnerships and companies. The compliance test requires all tax returns and payments across every tax to have been made on time over the previous twelve months, with limited tolerance. The business test requires a UK bank account and genuine construction trading.
Status is reviewed annually and can be withdrawn for compliance failures, so it rewards continued organisation. A refused application cannot be repeated for twelve months, which is why the compliance record should be checked honestly before applying. Our gross status application at £119 assembles the evidence and applies.
VAT and the reverse charge
If you are VAT registered and supply construction services within CIS to a VAT-registered contractor, the domestic reverse charge applies since March 2021: you do not charge VAT on your invoice, the contractor accounts for it, and your invoice must say that the reverse charge applies. Your input VAT on costs is reclaimed as normal, which often puts reverse-charge subcontractors in a repayment position each quarter. Getting the invoicing wrong in either direction is common and attracts HMRC attention.
Getting the refund done
Our CIS subcontractor return at £149 prepares the full Self Assessment with every deduction statement reconciled, the expenses claimed and the refund tracked with HMRC until it arrives. Registration for new subcontractors is handled through CIS registration.
A worked example
A self-employed bricklayer invoiced £42,000 of labour in 2026/27, all to registered contractors, and suffered £8,400 of deductions at 20%. His allowable expenses, including a van on the mileage basis, tools, boots, insurance and a share of phone and home costs, came to £6,500, giving a profit of £35,500. Income tax on £35,500 after the £12,570 personal allowance is £4,586 and Class 4 National Insurance is £1,375.80, a total of £5,961.80 against deductions of £8,400. Filing his return in late April produced a refund of about £2,440 in May. Had he been unregistered and deducted at 30%, the refund would have been £6,640, but he would have waited a year for £4,200 of it that the registration would have left in his pocket month by month.
Record keeping for subcontractors
Keep every deduction statement, every invoice, bank statements showing the net payments, receipts for expenses and a mileage log, for at least five years after the 31 January deadline. Deduction statements are the one document that cannot be reconstructed from your own records, so chase any contractor that does not send them within the month. If a contractor has deducted tax and not paid it over to HMRC, the subcontractor is still entitled to credit for it provided the deduction statement exists, which is another reason to insist on the statement every month.
A worked example
A self-employed bricklayer invoiced £42,000 of labour in 2026/27, all to registered contractors, and suffered £8,400 of deductions at 20%. His allowable expenses, including a van on the mileage basis, tools, boots, insurance and a share of phone and home costs, came to £6,500, giving a profit of £35,500. Income tax on £35,500 after the £12,570 personal allowance is £4,586 and Class 4 National Insurance is £1,375.80, a total of £5,961.80 against deductions of £8,400. Filing his return in late April produced a refund of about £2,440 in May. Had he been unregistered and deducted at 30%, the refund would have been £6,640, but he would have waited a year for £4,200 of it that the registration would have left in his pocket month by month.
Record keeping for subcontractors
Keep every deduction statement, every invoice, bank statements showing the net payments, receipts for expenses and a mileage log, for at least five years after the 31 January deadline. Deduction statements are the one document that cannot be reconstructed from your own records, so chase any contractor that does not send them within the month. If a contractor has deducted tax and not paid it over to HMRC, the subcontractor is still entitled to credit for it provided the deduction statement exists, which is another reason to insist on the statement every month.
A worked example
A self-employed bricklayer invoiced £42,000 of labour in 2026/27, all to registered contractors, and suffered £8,400 of deductions at 20%. His allowable expenses, including a van on the mileage basis, tools, boots, insurance and a share of phone and home costs, came to £6,500, giving a profit of £35,500. Income tax on £35,500 after the £12,570 personal allowance is £4,586 and Class 4 National Insurance is £1,375.80, a total of £5,961.80 against deductions of £8,400. Filing his return in late April produced a refund of about £2,440 in May. Had he been unregistered and deducted at 30%, the refund would have been £6,640, but he would have waited a year for £4,200 of it that the registration would have left in his pocket month by month.
Record keeping for subcontractors
Keep every deduction statement, every invoice, bank statements showing the net payments, receipts for expenses and a mileage log, for at least five years after the 31 January deadline. Deduction statements are the one document that cannot be reconstructed from your own records, so chase any contractor that does not send them within the month. If a contractor has deducted tax and not paid it over to HMRC, the subcontractor is still entitled to credit for it provided the deduction statement exists, which is another reason to insist on the statement every month.