A clear guide for UK construction contractors.
If you run a construction business in the UK and you pay subcontractors, you are almost certainly required to operate under the Construction Industry Scheme (CIS). It is not optional. It is not a tax bracket. It is a set of rules HMRC introduced to make sure subcontractors in construction pay the right tax, and the responsibility for getting it right sits with you, the contractor.
If that already sounds like something you would rather not deal with personally, you are in good company. CIS is one of the most common reasons construction businesses outsource their payroll. This guide explains what CIS actually is, what your responsibilities look like in practice, and how to stay on the right side of HMRC without losing a day a month to paperwork.
What is CIS, and who needs it?
The Construction Industry Scheme is a set of HMRC rules covering payments made by contractors to subcontractors for construction work in the UK. Under CIS, contractors deduct money from a subcontractor’s payment and pass it to HMRC, which counts as advance payment towards the subcontractor’s income tax and National Insurance.
You need to register as a contractor under CIS if you pay subcontractors for construction work, or if your business does not do construction but you have spent more than £3 million on construction in the last 12 months. Subcontractors who do construction work for contractors also need to register, although they can choose whether to register for standard deduction or apply for gross payment status (more on this below).
Construction work, for CIS purposes, is broader than people often expect. It covers site preparation, alterations, dismantling, repairs, decorating, demolition, and installations such as heating, lighting, power and ventilation. Architectural work, surveying, scaffolding hire without labour, and equipment delivery are generally outside CIS.
How CIS deductions work
When you pay a subcontractor, you deduct a percentage from their labour cost (not their materials cost) and pay that amount to HMRC. The rate depends on the subcontractor’s status:
Before you pay a subcontractor for the first time, you must verify them with HMRC. Verification confirms whether they are registered for CIS and at what rate. This is a non-negotiable step. Skipping it and paying the wrong rate is one of the most common causes of HMRC investigations into construction businesses.
Gross payment status
Gross payment status means the subcontractor receives the full payment with no CIS deduction, and pays their own tax and National Insurance through Self Assessment. Subcontractors can apply for gross status if they meet HMRC’s tests on turnover, compliance history, and business activity. The thresholds change occasionally, so it is worth checking the current figures before assuming someone qualifies.
For contractors, paying someone with gross status is administratively easier (no deductions to calculate), but you still have to verify their status with HMRC each time and report the payment on your monthly return.
Your monthly CIS responsibilities
If you are a contractor, every month you must:
Missing the deadline triggers automatic penalties (£100 for being one day late, increasing from there). HMRC takes CIS compliance seriously, and they have the data systems to spot patterns quickly.
Mixed PAYE and CIS schemes
Many construction businesses pay some workers as employees (under PAYE) and others as subcontractors (under CIS). Both schemes have to run in parallel, with separate reporting, separate deductions, and separate compliance. Mixing them up, treating an employee as a subcontractor or vice versa, is another classic HMRC enquiry trigger.
If you have any uncertainty about a particular worker’s status, it is worth getting it checked before the payment is made, not after. HMRC’s CEST (Check Employment Status for Tax) tool is the official starting point, but for borderline cases, professional advice is sensible.
Common CIS mistakes we see
How Lexarox Payroll handles CIS
CIS is our headline specialism. We run CIS payroll for construction contractors with subcontractor teams ranging from a handful to more than a hundred, and we manage the full cycle: verification, monthly deductions, CIS300 returns, payment and deduction statements, gross payment status applications, and mixed PAYE plus CIS schemes for businesses that have both employees and subcontractors.
We use the software you prefer (QuickBooks, Xero, BrightPay, Sage Payroll, MoneySoft), and our team handles HMRC correspondence on your behalf, including the calls and letters that take you out of your day. Penalties for missed deadlines are rare to non-existent when CIS is run by a specialist team rather than as a side task between other jobs.
If you run construction work and want your CIS handled properly, the first conversation is free. Book a no-obligation call at www.lexaroxpayroll.co.uk and we will walk through your setup and tell you exactly what it would take to switch.