by Steffen Kemmerzehl, MAAT, AATQB – The Accounting Hub
Many UK contractors and subcontractors working in construction are already within the Construction Industry Scheme (CIS), but still aren’t fully clear on how it actually works in day-to-day practice.
A small building company paying subcontracted electricians. A self-employed plasterer working across multiple sites. A scaffolder moving between contractors each week.
These are all very common setups in the UK construction industry, but CIS often creates confusion when deductions, paperwork, and HMRC reporting are not fully understood.
CIS is HMRC’s way of collecting tax from construction work at source. In simple terms, contractors deduct tax from subcontractor payments and pass it directly to HMRC.
It does not change how much tax is ultimately owed.
It changes how tax is collected during the year.
What CIS Actually Means in Practice
Under CIS, most contractors will need to:
• verify subcontractors with HMRC before paying them
• deduct 20% (or 30% if not verified) from labour payments
• submit monthly CIS returns to HMRC
• provide payment and deduction statements to subcontractors
• keep clear records of labour and materials
Subcontractors, in turn, need to:
• register for CIS (if appropriate)
• ensure deductions are correct
• keep records of income and CIS suffered
• include CIS on their tax return or company accounts
Common Real-World CIS Issues (What We See Regularly)
Even businesses that have been in construction for years still run into CIS problems.
Some of the most common issues include:
1. “I didn’t realise I needed to register”
Many subcontractors only discover CIS after being paid with 20% or 30% deducted.
2. Incorrect deductions on invoices
A frequent issue is CIS being applied to materials as well as labour, when it should usually only apply to labour.
3. Missing subcontractor verification
If a subcontractor is not correctly verified with HMRC, contractors may be forced to deduct 30% instead of 20%.
4. Poor record keeping
Losing CIS deduction statements or mixing invoices can lead to problems when completing tax returns or reclaiming tax.
5. Monthly CIS returns being missed
Contractors must submit CIS returns even if no payments were made. Missing returns can lead to penalties.
6. Misunderstanding employment status
Just because someone is “on CIS” does not automatically mean they are self-employed. HMRC can still challenge employment status if the working relationship looks like employment.
Why CIS Matters More Than It First Appears
CIS is not just paperwork. It directly affects cash flow, compliance, and tax position throughout the year.
For subcontractors, 20% or 30% being deducted can significantly impact cash flow if not planned properly.
For contractors, incorrect CIS handling can lead to HMRC penalties, compliance checks, and backdated liabilities.
It is one of those systems where small setup issues can quietly build into larger problems over time.
A Simple Example
Two subcontractors working in construction:
Subcontractor A
• not registered for CIS
• receives 30% deductions
• struggles with cash flow
• no clear record of CIS suffered
Subcontractor B
• properly registered with HMRC
• verified by all contractors
• receives 20% deductions
• keeps monthly CIS records
• claims CIS suffered back through tax return
Same work, but very different outcomes depending on setup and compliance.
Keeping CIS Simple
At FA Accountancy, we help contractors and subcontractors deal with CIS in a practical and straightforward way.
This includes:
• CIS registration and verification
• monthly CIS returns for contractors
• bookkeeping and record keeping
• subcontractor tax returns and CIS refunds
• limited company accounts involving CIS income
• correcting historic CIS errors
Most CIS problems are not caused by complexity, but by lack of clarity and setup issues early on.
Once the system is structured properly, it becomes much easier to manage month to month.
Useful CIS Information
HMRC Construction Industry Scheme Overview
If you are unsure whether CIS applies to you, or whether your current setup is correct, it is usually worth reviewing it before issues build up. Get in touch
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