What is CIS and how does it work? What are the main trades that fall under CIS?
The Construction Industry Scheme (CIS) is a UK tax system run by HMRC that applies to many businesses and self-employed people working in construction. Under CIS, contractors deduct money from payments made to subcontractors and send those deductions directly to HMRC as an advance payment towards the subcontractor’s tax and National Insurance liabilities.
Why does CIS exist?
It exists as it was hard to collect taxes from self employed contractors.CIS was introduced to reduce tax evasion and non-payment of taxes, ensure tax is collected throughout the year rather than waiting until a tax return is filed and create a clear record of payments between contractors and subcontractors.
It works similar to the PAYE scheme for employees, except it applies to many self-employed construction workers and subcontractors. Instead of receiving the full amount and paying tax later, part of the payment is withheld and sent to HMRC upfront.
How does CIS work?
Example 1: A registered subcontractor
A builder completes £1,000 worth of labour for a contractor, the builder is registered under CIS, the contractor deducts 20% (£200). The builder receives £800. The contractor sends the £200 to HMRC. The £200 is credited against the builder’s future tax bill.
Example 2: An unregistered subcontractor
Same £1,000 labour invoice. The subcontractor is not registered with CIS. The contractor deducts 30% (£300). The subcontractor receives £700. HMRC receives the £300.
Example 3: Gross payment status
Some subcontractors with a good tax compliance history can apply for gross payment status. Invoice: £1,000, CIS deduction: 0%, Subcontractor receives the full £1,000. They remain responsible for paying their tax through their normal tax return process.
Who is a contractor?
A contractor is generally a business that pays others to carry out construction work. For example it can be the main building contractors, house builder, property developers, large organisations spending significant amounts on construction projects.
Who is a subcontractor?
A subcontractor is someone hired by a contractor to perform construction work, such as a self-employed electrician, a plumbing company, a bricklaying business, A roofing contractor
What trades are covered by CIS?
CIS covers most construction work involving buildings, structures, roads, bridges and civil engineering projects. Examples include:
Covered trades
- Bricklayers
- Carpenters and joiners
- Electricians
- Plumbers
- Roofers
- Groundworkers
- Demolition contractors
- Painters and decorators
- Plasterers
- Tilers
- Steel erectors
- Heating and ventilation installers
- Civil engineering contractors (roads, bridges, drainage)
The covered activities also include site preparation and foundations, building extensions, renovations and repairs, installation of heating, lighting, water and ventilation systems, internal decorating after construction work and Demolition and dismantling work
What work is NOT usually covered?
Some activities associated with construction are excluded, including architects, Surveyors, Delivery-only businesses delivering materials, Carpet fitting, Scaffolding hire without labour, Manufacturers making building materials off-site Catering or canteen services on building sites
A practical real-world example
Imagine a house extension project:
- The homeowner hires ABC Construction Ltd (the contractor).
- ABC Construction hires a bricklayer, an electrician, a plumber, a plasterer
- Each of those trades invoices ABC Construction.
- ABC Construction verifies each subcontractor with HMRC.
- The contractor deducts CIS where required and pays HMRC.
- The subcontractors receive deduction statements and use those amounts when completing their tax returns.
In simple terms, CIS is HMRC‘s way of collecting tax at source across the construction supply chain, primarily affecting self-employed tradespeople and subcontracting businesses working on construction projects.