UK CIS Deep-Dive 2026/27: 20% / 30% / 0% Rates, GPS, Returns
CIS 2026/27: 20% and 30% deductions, Gross Payment Status tests, monthly returns by the 19th, the materials rule, reclaims and the VAT reverse charge.
Overview - what CIS does
Under the Construction Industry Scheme, a contractor paying a sub-contractor for construction work deducts money from the payment and passes it to HMRC. The deduction counts as an advance payment towards the sub-contractor's tax and National Insurance (per GOV.UK). The scheme is in Part 3, Chapter 3 of the Finance Act 2004 and the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045).
Three rates apply. 20% for sub-contractors who are registered for CIS and whom the contractor can verify. 30% if the sub-contractor is not registered or cannot be verified. 0% for sub-contractors with Gross Payment Status. The deduction is worked out after taking away VAT, materials and certain other costs. Sole traders and partners claim the deductions back through Self Assessment; limited companies set them against their PAYE bill.
Contractors must register before taking on their first sub-contractor, verify each new sub-contractor with HMRC before paying them, and file a monthly return by the 19th. Since 1 March 2021 most construction services between VAT-registered businesses within CIS also fall under the VAT domestic reverse charge, which changes who accounts for the VAT but not the CIS deduction. A business that does not do construction work becomes a "deemed contractor" once its construction spend exceeds £3 million in a year.
Worked example - sub-contractor invoice
A bricklayer sub-contractor invoices a main contractor for £50,000 of labour and £12,000 of materials the bricklayer paid for directly (total £62,000, VAT left aside). The deduction applies to the labour element only.
| Status | CIS rate | Deduction | Net received | Notes |
|---|---|---|---|---|
| Registered and verified | 20% | £10,000 | £52,000 | Labour £50,000 × 20%. Materials paid in full. |
| Unregistered or unverified | 30% | £15,000 | £47,000 | Labour £50,000 × 30%: £5,000 more withheld than at 20%. |
| Gross Payment Status | 0% | £0 | £62,000 | No deduction. The sub-contractor pays all its tax at the end of the year. |
The deductions are advance payments, not an extra tax: a sole trader's deductions are taken off the Self Assessment bill and any excess is repaid, and a company's are set against its PAYE bill and refunded if unused at the end of the tax year. What differs between the three routes is cash flow - when the money reaches HMRC - not the tax finally due on the profit.
Gross Payment Status (GPS) - the tests
To get GPS you must show HMRC that you have paid your tax and National Insurance on time in the past, that your business does construction work (or provides labour for it) in the UK, and that it is run through a bank account. HMRC also looks at your turnover for the last 12 months, ignoring VAT and the cost of materials (per GOV.UK: how to get gross payment status):
| Business type | Turnover test (last 12 months) |
|---|---|
| Sole trader | At least £30,000 |
| Partnership | At least £30,000 for each partner, or at least £100,000 for the whole partnership |
| Limited company | At least £30,000 for each director, or at least £100,000 for the whole company. If the company is controlled by 5 people or fewer, £30,000 for each of them |
HMRC reviews GPS every year and you must be on time with your tax returns and payments to keep it, although a small amount of late payments or returns is allowed. If you are about to fail the review HMRC writes to explain why, and you can reply with your reasons. If it withdraws GPS it gives 90 days' notice, you have 30 days to appeal, and you must wait a year before reapplying. Time to pay agreed with HMRC does not affect GPS (per GOV.UK: annual review). Losing GPS changes cash flow: a sub-contractor with £400,000 a year of labour billed would have £80,000 withheld at 20% over the year, recovered only through its tax return or payroll scheme.
Monthly returns and penalties
Contractors file a monthly return by the 19th following the end of each tax month: for the tax month 6 May to 5 June, the return must reach HMRC by 19 June. On it you declare that the sub-contractors listed are not employees; giving the wrong employment status can cost a penalty of up to £3,000. If you made no payments in a month, you must file a nil return or make an inactivity request (per GOV.UK: file your monthly returns).
| How late the return is | Penalty |
|---|---|
| 1 day late | £100 |
| 2 months late | £200 |
| 6 months late | £300 or 5% of the CIS deductions on the return, whichever is higher |
| 12 months late | £300 or 5% of the CIS deductions on the return, whichever is higher |
For returns later than 12 months, an additional penalty of up to £3,000 or 100% of the CIS deductions on the return, whichever is higher, may be charged. Each late return is penalised separately. You can appeal within 30 days of the date on the penalty notice, online or in writing, but not by phone.
Domestic Reverse Charge VAT - the parallel obligation
From 1 March 2021 the VAT domestic reverse charge applies to most standard and reduced-rate building and construction services supplied between VAT-registered businesses and reported within CIS. The services covered are the same as CIS "construction operations", except supplies of workers by employment businesses (per GOV.UK).
The supplier's invoice shows all the normal VAT invoice details, makes clear that the reverse charge applies and that the customer must account for the VAT, but does not include the VAT in the amount charged. The supplier enters only the net value of the sale on its VAT return. The customer adds the VAT to the output tax on its own VAT return and can reclaim it as input tax on the same return under the normal rules (per the VAT reverse charge technical guide).
The reverse charge does not apply where the customer is an end user - a VAT and CIS registered business that does not make onward supplies of the construction services it receives - or an intermediary supplier connected or linked to an end user, and the customer has told the supplier so in writing. Building contractors are not usually end users, because they make onward supplies. Supplies to private householders are outside the reverse charge because the customer is not VAT registered.
The reverse charge does not change the CIS deduction. In the worked example above, if the whole £62,000 supply is standard-rated and the reverse charge applies, the invoice carries no VAT; a registered sub-contractor has £10,000 deducted (20% of the labour) and receives £52,000; and the contractor accounts for £12,400 of VAT (20% of £62,000) as output tax, which it can normally reclaim on the same return.
Deemed contractor rule - the £3m test
A business that does not do construction work counts as a contractor if, in the year ending at any time, its expenditure on construction operations exceeds £3,000,000 (Finance Act 2004 s.59(1)(l), substituted by Finance Act 2021 Sch 6 from 6 April 2021). GOV.UK gives housing associations and arm's length management organisations, local authorities and government departments as examples, and says a business likely to become a deemed contractor must monitor its construction spend.
CIS does not apply to a deemed contractor paying for work on property (not for sale or rent) for its own business use, or for a contract worth less than £1,000 excluding materials (which needs an exemption from the CIS helpline). Once the condition stops being met the business stops being a contractor, unless it elects to be treated as continuing until it expects no further construction spend; it can also elect to stop early if it expects no further construction spend (s.59(3) and (3A)). A deemed contractor that expects to make no contract payments for the foreseeable future can ask HMRC for a longer inactivity period.
Related calculators and profession landings
- CIS calculator - the CIS deduction and net payment at 20%, 30% and 0%.
- Self-employed calculator - sole trader Income Tax and NI, against which CIS deductions are credited.
- Corporation tax calculator - Corporation Tax on a limited company's profit.
- Bricklayer pay - a trade often paid under CIS.
- Electrician pay - CIS sub-contracting on new-build and commercial work.
- Plumber pay - where the materials deduction often matters.
- Scaffolder pay - scaffolding with labour is within CIS; hire without labour is not.
- Glazier pay - CIS on installation work.
- Sole trader vs Limited Company guide - the structure decides how deductions are reclaimed.
- UK VAT rates guide - VAT rates, including the construction reverse charge.
Frequently asked questions
What is the Construction Industry Scheme and who falls within it?
Under CIS, contractors deduct money from a subcontractor's payments and pass it to HMRC. The deductions count as advance payments towards the subcontractor's tax and National Insurance. Contractors must register; subcontractors do not have to, but deductions are taken at a higher rate if they are not registered. CIS covers most construction work to buildings and civil engineering works: site preparation, demolition and dismantling, building work, alterations, repairs and decorating, installing heating, lighting, power, water and ventilation systems, and cleaning the inside of buildings after construction work (per GOV.UK).
What is the difference between 20%, 30% and Gross Payment Status?
A contractor deducts 20% if the subcontractor is registered for CIS and the contractor can verify them, and 30% if either is not the case. A subcontractor with Gross Payment Status is paid in full with no deduction and pays all their tax and National Insurance at the end of the tax year. The 20% and 30% rates are set by the Finance Act 2004, Section 61(2), (Relevant Percentage) Order 2007 (SI 2007/46).
What construction work is in scope?
"Construction operations" are defined in section 74 of the Finance Act 2004. GOV.UK lists as covered: preparing the site (for example laying foundations and providing access works), demolition and dismantling, building work, alterations, repairs and decorating, installing systems for heating, lighting, power, water and ventilation, and cleaning the inside of buildings after construction work. It lists as not covered: architecture and surveying, scaffolding hire with no labour, carpet fitting, making materials used in construction (including plant and machinery), delivering materials, and work on site that is clearly not construction, such as running a canteen or site facilities.
How do I become CIS-registered as a sub-contractor?
Register online with your legal business name (and trading name if different), your business's Unique Taxpayer Reference (UTR), your VAT number if you are VAT registered and the date you started trading; depending on your circumstances you may also need your National Insurance number, Company Registration Number or partners' details. If you do not have a UTR, register as a new business for Self Assessment and choose "working as a subcontractor", which registers you for Self Assessment and CIS at the same time. Give each contractor exactly the details you registered with, because they use them to verify you.
How do I apply for Gross Payment Status?
You must show HMRC that you have paid your tax and National Insurance on time in the past, that your business does construction work (or provides labour for it) in the UK, and that it is run through a bank account. HMRC looks at your turnover for the last 12 months, ignoring VAT and the cost of materials: at least £30,000 for a sole trader; £30,000 for each partner or £100,000 for the whole partnership; £30,000 for each director or £100,000 for the whole company (or £30,000 for each person if 5 or fewer people control it). HMRC reviews Gross Payment Status every year. If it is withdrawn you must wait a year before reapplying.
What is the materials carve-out and how is it calculated?
The deduction is taken from the gross invoice after taking away what the subcontractor paid for VAT, consumable stores (equipment that is now unusable), fuel used except for travelling, plant hire for the job, manufacturing or prefabricating materials, and materials they paid for directly. The contractor can ask for evidence such as receipts, and if there is none must estimate the cost of materials. The statutory basis is the "direct cost to the sub-contractor of materials" in section 61(1) of the Finance Act 2004.
What are the contractor monthly return obligations?
Contractors send a monthly return by the 19th following the end of each tax month (tax month 6 May to 5 June: return due 19 June), declaring that the subcontractors listed are not employees. If no payments were made in the month, they must either file a nil return or make an inactivity request, which lasts up to 6 months. Payment and deduction statements must reach each subcontractor within 14 days of the end of the tax month, and deductions must be paid to HMRC by the 22nd (19th if paying by post).
How does a sub-contractor reclaim CIS deductions?
Sole traders and partners record their total pay before deductions as income and the deductions as "CIS deductions" on their Self Assessment return; HMRC takes the deductions off the tax owed and repays any excess. Limited companies use their payroll scheme instead: they enter the year-to-date CIS deductions on an Employer Payment Summary, HMRC sets them against the company's PAYE bill, unused amounts carry forward within the tax year, and anything left after the year ends is claimed as a refund. GOV.UK warns companies not to use the Corporation Tax return to pay tax with CIS deductions.
What are the late-return penalties?
For a late monthly return: £100 at 1 day late, £200 at 2 months, £300 or 5% of the CIS deductions on the return (whichever is higher) at 6 months, and the same again at 12 months. Later than that, an additional penalty of up to £3,000 or 100% of the deductions on the return, whichever is higher, may apply. Each late return is penalised separately. You can appeal within 30 days of the penalty notice, online or in writing.
How does CIS interact with the Domestic Reverse Charge VAT?
From 1 March 2021 the VAT domestic reverse charge applies to most standard and reduced-rate building and construction services supplied between VAT-registered businesses and reported under CIS. The supplier does not charge VAT; the customer adds the VAT to the output tax on its own VAT return and can reclaim it as input tax under the normal rules. It does not apply where the customer is an end user (a VAT and CIS registered business that does not make onward supplies of the construction services) or an intermediary supplier connected to one, and has told the supplier in writing. The CIS deduction is unaffected.
What records must I keep?
Contractors must keep, for at least 3 years after the end of the tax year they relate to, the gross amount of each payment invoiced by subcontractors (excluding VAT), the deductions made and, where deductions were made, the cost of materials invoiced (excluding VAT). The fine for not being able to show CIS records is up to £3,000. Subcontractors should keep their monthly payment and deduction statements; sole traders must keep business records for at least 5 years after the 31 January Self Assessment deadline for the year.
What is the "deemed contractor" rule?
A business that does not do construction work becomes a contractor if, in the year ending at any time, its expenditure on construction operations exceeds £3,000,000 (Finance Act 2004 s.59(1)(l), substituted by Finance Act 2021 Sch 6 from 6 April 2021). GOV.UK gives housing associations, local authorities and government departments as examples. A deemed contractor does not operate CIS on work on property (not for sale or rent) for its own business use.