CIS for Contractors: Verifying Subbies, Deducting Right and Filing the Monthly Return

↑ Part of the Tax & VAT series · CIS for Subcontractors, Explained Simply

The moment you pay another trade to do construction work for you, HMRC calls you a contractor under the Construction Industry Scheme (CIS), and a set of monthly jobs lands on your desk that nobody mentioned when you took on your first subbie. You verify each one with HMRC, take a deduction off the labour part of what you pay them, hand that money to HMRC, file a return every month and give each subcontractor a statement of what you held back. Miss the return and the penalty starts at £100 and climbs. This page is the whole routine, in the order you do it.

It sits beside our CIS for Subcontractors guide, which covers the scheme from the other side: what it feels like to be the one having 20% taken off. Most small firms are both at once, paid under CIS by a main contractor and paying their own labour-only subbies under it too.

Part 1Are you a contractor?

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You are a CIS contractor if your business pays subcontractors for construction work. That includes builders, developers, and any trade that brings in other trades: a kitchen fitter who pays a self-employed sparky to do the electrics is a contractor for that payment. It does not matter how small the job is or how often it happens.

There is a second route in, called being a deemed contractor. A business whose main trade is not construction (a shop chain, a landlord company, a farm) becomes a CIS contractor once it spends more than £3 million on construction in any rolling 12 months. Most trades reading this will never meet it, but if you run a sideline that buys a lot of building work, it is worth knowing.

Two things CIS does not cover. Paying an employee is PAYE, not CIS, and calling someone a subbie when they work only for you, to your hours, with your tools, does not make them one. HMRC looks at the working relationship, not the label on the invoice. And paying for materials only, or for work that is not construction (an architect's drawings, a skip hire firm, a scaffold inspection), is outside the scheme.

Part 2Register before the first payment

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Register as a contractor with HMRC before you pay a subcontractor for the first time. It is done through your business tax account, and HMRC sets you up with a PAYE-style reference that the monthly returns run against. If you already employ people, CIS is added to your existing employer scheme rather than set up separately.

The registration is the easy part. The discipline that follows is what the rest of this page is about.

Part 3Verify every subcontractor

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Before you pay a subcontractor for the first time, you verify them with HMRC, either through the online CIS service or through payroll software that supports it. You give HMRC the subbie's name, Unique Taxpayer Reference and National Insurance number (or company registration number for a limited company), and HMRC tells you which rate to deduct:

• 0%, if the subcontractor has gross payment status. You pay them in full.
• 20%, the standard rate for a subcontractor who is registered for CIS.
• 30%, if HMRC cannot match them, which usually means they are not registered or the details you gave do not agree with HMRC's.

HMRC gives you a verification reference. Keep it; it is what proves you deducted at the rate you were told to. You do not need to re-verify a subcontractor you have paid and included on a return within the current or previous two tax years. If it has been longer than that, verify again, because their status may have changed.

The 30% rate is the one that causes arguments. A subbie who is not registered will feel the difference on every payment and will ask you to "just do 20%". You cannot. The rate is HMRC's decision, and the fix is for them to register, which takes them a few minutes and sorts it from the next verification onwards.

Part 4What the deduction comes off

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The deduction is worked out on the labour element of the payment. You take off, before applying the percentage:

• the direct cost of materials the subcontractor bought for the job,
• plant hire they paid a third party for,
• consumable stores and fuel for plant (not fuel for travel),
• and VAT, if they are VAT-registered and charging it.

Travel, subsistence and any profit the subcontractor has added to materials are not excluded; they count as labour for CIS purposes. If a subbie's invoice does not split materials from labour, ask for one that does, because you can only exclude a materials cost you can see.

Labour and plant	£2,800.00
Materials, at direct cost	£1,200.00
Subcontractor's invoice	£4,000.00
CIS at 20%, on the labour only	−£560.00
Paid into the subcontractor's account	£3,440.00

Had HMRC returned 30% for the same subcontractor, the deduction would be £840 and the payment £3,160. The £560 (or £840) is not yours; it is the subcontractor's tax, held by you for HMRC.

If the subcontractor is VAT-registered and the job is one the Domestic Reverse Charge applies to, their invoice will show the VAT but not charge it, and you account for that VAT on your own return. CIS and the reverse charge run side by side on the same invoice; one is about income tax, the other about VAT, and neither changes the other's sum.

Part 5The monthly return, by the 19th

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Every month you file a CIS return covering the tax month that ended on the 5th, and it is due by the 19th. It lists every subcontractor you paid, the gross amount, the materials you excluded, and the deduction you made. You file it even if you made no deductions at all, because gross-status subbies still go on it.

If you paid nobody in a month, file a nil return, or tell HMRC you will be inactive for a period (up to 6 months at a time) so it stops expecting one. Forgetting the nil return earns exactly the same penalty as forgetting a real one.

The deductions themselves go to HMRC monthly with your PAYE, by the 22nd if you pay electronically (the 19th by post). Quarterly payment is allowed if your combined PAYE and CIS liability is small, but the return is still monthly.

Part 6The statement you owe each subbie

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Within 14 days of the end of each tax month, so again by the 19th, you give every subcontractor you deducted from a payment and deduction statement: what you paid them gross, what materials you excluded and what you held back. It is their evidence when they claim the deduction against their own tax bill, and a subbie who cannot get one from you will, quite reasonably, complain to HMRC. Most payroll and accounts software produces it automatically. A dated email with the figures on it is enough if yours does not.

Part 7The penalties

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The late-return penalties are fixed and automatic:

• £100 the day after the 19th.
• A further £200 if it is 2 months late.
• At 6 months late, a further £300 or 5% of the deductions on the return, whichever is more.
• At 12 months late, another £300 or 5%, and up to £3,000 or 100% of the deductions where HMRC decides the information was deliberately withheld.

So one forgotten month is £100. One forgotten month that nobody notices for a year is over £900 on a return that might have carried a £560 deduction. A new contractor also gets a first-year cap of £3,000 across all late returns, which is a mercy, not a target.

HMRC can also charge interest and penalties on deductions paid late, and can take away your own gross payment status, if you hold it, for a poor CIS record as a contractor. That last one is the expensive version: the compliance test for gross status includes your behaviour on this side of the scheme too.

Part 8Records, and how long to keep them

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Keep, for 3 years after the end of the tax year they relate to: each subcontractor's verification details, every invoice, the materials split, what you deducted and the statements you issued. HMRC can ask for them and the penalty for not producing them is up to £3,000.

The easy way to keep this clean is to insist on it at the start: a written quote from every subbie with labour and materials on separate lines, before they start. A real subcontract quote shows what that looks like from their side, with the 20% line worked out in the totals and the materials that CIS never touches kept separate underneath.

Common questionsCIS for contractors FAQ

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Do I have to register as a contractor for one small job?

Yes, if you are paying a subcontractor for construction work. There is no minimum. The paperwork for a single payment is one verification, one line on one return and one statement.

What if I paid a subbie without verifying them first?

Verify them now, deduct at the rate HMRC gives you on the next payment, and include the earlier payment on the return for the month you made it. If you deducted nothing when you should have deducted 20%, HMRC can ask you for that money; it does not fall on the subcontractor.

Can I deduct CIS from a limited company subcontractor?

Yes. CIS applies to sole traders, partnerships and companies alike. A company subbie is verified with its company registration number and UTR, and the deduction is set against its PAYE and Corporation Tax bills.

Do I file a return in a month with no payments?

Yes, a nil return, unless you have told HMRC you are inactive. A missing nil return is penalised like any other.

Does CIS apply to the VAT on a subcontractor's invoice?

No. VAT is taken out before the deduction is worked out. If the reverse charge applies, there is no VAT on the invoice to take out in the first place.

This guide is general information for UK tradespeople, current to the best of our knowledge in 2026, and is not tax, accounting or legal advice. Rates, thresholds and how they apply to you change, so confirm your position with HMRC, a qualified accountant or a solicitor before relying on it. TradeDraft accepts no liability for decisions made on the basis of this guide. Questions: hello@tradedraft.co.uk.