The Construction Industry Tax Deduction Scheme (CIS)

The Construction Industry Scheme (or CIS, as it is more commonly known) is a tax deduction scheme. It concerns construction work and applies to payments made by any person who

  • carries on a business that includes construction work (for example, construction companies and property developers); or
  • carries on any other type of business if that person has spent, on average, more than £1 million on construction work in the previous three accounting periods (other than expenditure on works to owner-occupied properties); by way of example, this would apply to banks, local governments, NHS trusts and retail businesses that commission construction work.


For the purposes of the relevant legislation, any person who makes a payment to which the CIS rules apply is termed a "contractor" and any person receiving such a payment is termed a "sub-contractor".


Where the scheme applies, the person paying for the construction work must check whether its sub-contractor is registered with HMRC as entitled to receive gross payment under deduction of tax or is not registered with HMRC at all.

If the sub-contractor is registered with HMRC as entitled to receive payment under deduction of tax or not registered at all, the payer must deduct tax from each payment and account for this to HMRC (see below). Other compliance obligations may also apply.

This toolkit considers the position of construction contractors and businesses paying for construction work. It does not address the position of sub-contractors.


The CIS applies to all payments made by a contractor to a sub-contractor under a contract relating to "construction operations".

It applies whether the sub-contractor is carrying out the works itself or providing its own or another's labourers to do the work or is merely answerable to the contractor for carrying out the works.

Payments to agencies providing workers will also be covered, unless the agency is merely introducing workers who will then enter into contracts directly with the contractor.


"Construction operations" include almost everything typically done to buildings:

  • construction, repair and alteration;
  • demolition and site clearance;
  • the installation of heating and lighting systems, drainage, power and water;
  • landscaping and the provision of roads and other access works; and
  • internal and external decorating. Certain operations are, however, excluded:
  • operations which are not carried out in the UK;
  • oil, gas and mineral extraction operations;
  • the installation of certain plant and machinery or security systems; and
  • the professional work of architects, surveyors or consultants.


In principle, all payments made under a contract for construction operations fall within the CIS and might, therefore, have to be made after deduction of tax - even payments which themselves do not relate to the construction operations.

One example of where this may cause difficulties is in relation to a lease under which the landlord has agreed to carry out construction works: the tenant may be a contractor within the CIS and, if not occupying the property in question for its own business, the obligation to deduct tax will apply to all payments, including rent, paid to the landlord under the lease.

Accordingly, consideration should be given to splitting a contract which relates to other matters (as well as construction operations) into two or more separate agreements (in the example above, by placing the obligations to carry out the construction work in an agreement which is wholly separate from the lease).

There are, however, some payments to which the CIS does not apply. These include (broadly):

  • reverse premiums paid by a landlord to a tenant as an inducement to enter into the lease. However, this exemption will not normally include a landlord's contributions towards its tenant's works, unless the contribution amounts to an inducement to enter into the lease;
  • payments made by a business which is not a construction business on property which is occupied by that business or by a company within the same group;
  • payments made by a public body under a PFI/PF2 transaction: a "public body" would include an NHS Trust, a local authority or any other government department;
  • generally, payments where the contractor payments do not exceed £1,000; and
  • payments in respect of materials, or in respect of VAT (including VAT paid on materials costs where the sub- contractor is not VAT registered).



A contractor making a payment within the CIS must verify with HMRC whether the person to whom it is proposing to make the payment is registered for gross payment or payment under deduction (in which case, the contractor must deduct tax at 20% from the payment) or, alternatively, is not registered at all (in which case, the contractor must deduct tax at 30%). Verification need only be made once: HMRC will notify a contractor if the status of one of its sub-contractors changes.

Verification is not, however, required where the sub-contractor has been included in a monthly return (see "Compliance" below) in the current or two preceding tax years.


Within 14 days after the end of every tax month, each contractor must:

  • submit a monthly return to HMRC that contains specified information about each sub-contractor to whom payments have been made in the previous month (including a declaration that none of the contracts in question is an employment contract). Where the contractor can show that it will not be making any payments for several months, HMRC will suspend the monthly return procedure for six months;
  • give a statement to each sub-contractor containing specified information; and
  • pay to HMRC any amount which it is liable to deduct from payments (whether or not it has actually made the deduction). Contractors whose overall deduction-at-source payments to HMRC will not exceed £1,500 per month can elect to pay quarterly. Contractors who are large employers required to account for PAYE electronically must also account for CIS payments electronically. Where a contractor makes a payment electronically to HMRC, it has 17 days from the end of the tax month in which to make it rather than 14.
  • Failure to meet the compliance obligations is likely to result in penalties. Accordingly, all "contractors" within the CIS should make sure they carry out the relevant verifications (and record the results) and have systems in place to ensure that the correct deductions are made and paid to HMRC (where relevant) and for making monthly returns and issuing statements to their sub-contractors.