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.

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).

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.

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 Obligations as a Contractor

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

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.

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.

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

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 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

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.

Speak to a Specialist About High-Volume CIS Risk Management

At Cigma Accounting, we help construction companies across London manage CIS obligations with accuracy and control, ensuring subcontractor payments, deductions, and reporting are handled correctly. From Fulham Broadway, including Battersea Square and Battersea Bridge Area, high-revenue businesses often face increasing complexity as projects scale, which is why our approach focuses on clear systems, reliable processes, and reducing compliance risk.

CIS errors can lead to penalties, cash flow disruption, and HMRC scrutiny, particularly when verification and monthly returns are not managed consistently. With physical offices across London, we support construction businesses in maintaining accurate records, meeting deadlines, and keeping their reporting fully aligned with HMRC requirements.