CIS Compliance for Construction Companies: A Practical Guide to the Construction Industry Scheme

If your business makes payments to subcontractors for construction work, you have obligations under the Construction Industry Scheme (CIS). For high-revenue construction companies, the volume of subcontractor payments means that even small errors in CIS deduction rates or filing deadlines can result in significant penalties and HMRC scrutiny.

Effective CIS compliance depends on having consistent processes for subcontractor verification, deductions, monthly reporting, payment statements and record-keeping. For larger construction companies, these obligations become more important as transaction volumes and supply-chain complexity increase.

This guide explains how CIS works, what your obligations are as a contractor, the deduction rates that apply to different types of subcontractors, and the VAT domestic reverse charge – one of the most significant compliance changes for the construction sector in recent years.

What Is the Construction Industry Scheme?

CIS is an HMRC scheme that requires contractors to deduct money from payments made to subcontractors for construction work, and pass those deductions to HMRC. The deductions count as advance payments towards the subcontractor’s income tax and National Insurance liabilities.

For a complete overview of how the Construction Industry Scheme is structured, who it applies to, and what obligations it creates for contractors and subcontractors across all business sizes, read our full guide to the Construction Industry Scheme.

CIS applies to payments for construction operations – which includes building, alteration, repair, extension, demolition, and installation of systems in buildings. It does not apply to professional services like architecture, surveying, or engineering design, even if those services are provided by a company that also does construction work. Correct classification of payments matters.

Businesses must operate as CIS contractors if they pay subcontractors for construction work, or if they spend more than £3 million on construction in any rolling 12-month period (even if their primary business is not construction).

These obligations form part of the wider CIS compliance rules contractors need to follow. Correctly identifying whether a payment falls within CIS is therefore the first step before deciding how the subcontractor should be verified and whether a deduction applies.

CIS Deduction Rates: The Three Tiers

The rate of CIS deduction you apply depends on the subcontractor’s registration status with HMRC. There are three rates:

0% – Gross Payment Status

Some subcontractors qualify to receive their payments gross, with no deduction. To qualify, a subcontractor must pass HMRC’s turnover test, compliance test (up-to-date tax returns and no history of significant non-compliance), and business test. Gross payment status must be applied for through HMRC and is reviewed annually.

It is the most tax-efficient status for a subcontractor and worth encouraging qualifying subcontractors to apply for.

20% – Registered Subcontractor

The standard rate for subcontractors who are registered for CIS but do not hold gross payment status. This is the most common rate.

30% – Unregistered Subcontractor

If a subcontractor cannot be verified with HMRC (either because they are not registered or because verification cannot be completed), you must deduct 30% from their payment. This significantly reduces the subcontractor’s cash flow and is a strong incentive for subcontractors to register.

As a contractor, you must verify each new subcontractor with HMRC before making a first payment. Verification is done through the CIS online service or by calling HMRC. Once verified, the subcontractor’s status is confirmed and you apply the appropriate rate.

Accurate verification is central to HMRC CIS compliance because the result determines the deduction rate the contractor must use. Retaining the verification details also provides evidence of the basis on which the payment was processed.

Applying the wrong deduction rate is one of the most frequently penalised errors under CIS. Read our guide on common mistakes that lead to penalties under CIS and how to avoid them for a full breakdown of where contractors most commonly go wrong and how to protect your business.

Your Monthly CIS Contractor Compliance Obligations

CIS compliance is not just an annual task – it involves monthly filings and payments. The key obligations are:

For larger contractors, CIS contractor compliance should be managed as a repeatable monthly process rather than a year-end review. Verification records, payment calculations, deduction statements and return figures should all reconcile before information is submitted to HMRC.

Monthly Returns

You must file a CIS monthly return for each tax month (which runs from the 6th to the 5th of the following month). The deadline for filing is the 19th of the month following the tax month.

For example, the return for the tax month 6 March to 5 April must be filed by 19 April.

Even if you have not made any payments to subcontractors in a month, you must still file a nil return. Failure to file – even a nil return – incurs an automatic penalty.

For a structured approach to ensuring your monthly returns are filed accurately and on time every month, read our guide on best practices for contractors to file accurate and timely CIS returns to HMRC.

Payment Statements

You must provide each subcontractor with a payment and deduction statement each month that you make a deduction from their payment. This statement shows the gross payment, the amount deducted, and the net amount paid.

Subcontractors need these statements to claim credit for CIS deductions on their own tax returns.

PAYE Remittance

The CIS deductions you collect must be remitted to HMRC as part of your employer PAYE payment, alongside income tax and National Insurance deducted from your own employees’ wages.

Keeping these monthly tasks aligned is an important part of the CIS compliance rules. Differences between subcontractor statements, CIS returns and amounts remitted to HMRC can create avoidable reconciliation issues during a compliance review.

The VAT Domestic Reverse Charge for Construction

Since 1 March 2021, the VAT domestic reverse charge applies to most construction services that are within the scope of CIS. This is one of the most significant VAT changes for the construction sector in years and directly affects how contractors and subcontractors account for VAT.

Under the reverse charge, when a CIS-registered subcontractor invoices a CIS-registered contractor for covered construction services, the subcontractor does not charge VAT on the invoice. Instead, the contractor accounts for the VAT on the subcontractor’s behalf (on the contractor’s own VAT return), and also reclaims it on the same return. The net VAT position for the contractor is nil, but the VAT is no longer sitting with the subcontractor between invoice and payment.

The practical impact is significant: subcontractors no longer collect VAT on reverse charge supplies, which reduces their cash flow on those invoices. Contractors need to ensure their accounting software handles the reverse charge correctly, as errors in VAT returns can result in assessments.

The domestic reverse charge does not apply to supplies to end users (customers who are not in the construction business), supplies of building materials only (without construction services), or businesses below the VAT registration threshold.

For construction companies managing both CIS and VAT at scale, CIS compliance should therefore be coordinated with VAT processes. The same subcontractor invoice can affect CIS deductions, the contractor’s payment records and VAT reporting, making consistent accounting treatment important.

CIS Record Keeping Requirements

HMRC expects contractors to retain CIS records for a minimum of three years. These records should include:

• Verification references for each subcontractor
• Records of all payments made and deductions applied
• Copies of payment and deduction statements issued
• Monthly return confirmations from HMRC

CIS record keeping is a core part of HMRC CIS compliance because these records provide the evidence supporting subcontractor status, deduction calculations and the figures reported on monthly returns.

Good record-keeping is your first line of defence if HMRC carries out a CIS compliance check. Given the volume of transactions for high-revenue construction companies, using accounting software that automates CIS tracking and return preparation is strongly advisable.

For high-revenue businesses, effective CIS record keeping also makes it easier to reconcile large volumes of subcontractor transactions and identify missing verification references, incorrect deductions or incomplete statements before they become wider compliance issues.

For construction companies operating at higher revenue levels, managing CIS compliance as part of a wider financial management and risk strategy becomes increasingly important. Read our guide on CIS compliance for high revenue construction companies to understand the broader obligations and strategies that apply at scale.

Monthly CIS Compliance Checklist

• Verify any new subcontractors with HMRC before making payment
• Apply the correct deduction rate (0%, 20%, or 30%) based on verification status
• Deduct the correct amount from each qualifying payment
• Issue a payment and deduction statement to each subcontractor from whom a deduction is made
• File your CIS monthly return by the 19th of the following month
• Include CIS deductions in your PAYE remittance to HMRC
• Apply the VAT domestic reverse charge correctly on applicable subcontractor invoices
• Retain all CIS records for at least three years

This checklist summarises the recurring CIS contractor compliance tasks that should be reviewed each month. For larger businesses, assigning responsibility for each stage and maintaining a clear audit trail can reduce the risk of gaps between operational records and HMRC submissions.

For a practical breakdown of all the monthly tax tasks contractors need to stay on top of under CIS — covering the full range of recurring obligations beyond this checklist — read our guide on CIS contractors monthly tax chores.

Case Study: Strengthening CIS Compliance for a Growing Construction Company

A growing construction company approached our Wimbledon office after a significant increase in projects and subcontractor payments. As transaction volumes increased, the directors became concerned that their existing processes were no longer sufficient to maintain reliable CIS compliance across the business.

Cigma Accounting reviewed the company’s subcontractor records, HMRC verification results, deduction calculations and monthly CIS returns. We identified inconsistencies in how new subcontractors were verified and found that supporting verification references were not always retained alongside the relevant payment records.

We introduced a structured monthly CIS contractor compliance process. New subcontractors were checked before payment, the appropriate 0%, 20% or 30% deduction rate was recorded from the HMRC verification result, and payment and deduction statements were reconciled against the figures used for monthly CIS reporting.

The review also covered the company’s CIS record keeping. Verification references, subcontractor invoices, payment records, deduction statements and return confirmations were organised to provide a clearer audit trail if HMRC later carried out a CIS compliance check.

Because many subcontractor transactions also affected VAT, we reviewed the company’s treatment of the VAT domestic reverse charge alongside its CIS processes. This helped prevent the accounts team from confusing VAT treatment with the separate calculation of CIS deductions.

As part of the wider engagement, Cigma Accounting supported the company with CIS monthly returns, construction bookkeeping, payroll and VAT returns. Bringing these services together gave the directors greater visibility over subcontractor payments and reduced the risk of discrepancies between accounting records and HMRC submissions.

The company was left with a repeatable monthly compliance process that could continue working as subcontractor volumes increased, rather than relying on corrections shortly before filing deadlines.