If you work in the UK construction industry, the Construction Industry Scheme (CIS) will likely affect how you pay others and how you get paid. As a sole trader or a limited company, it’s important to understand the rules. This helps you stay compliant, avoid fines, and keep your cash flow steady.
This blog explains CIS in simple steps — from registration and payment deductions to record-keeping and the key differences between working as a sole trader or a limited company.
What is the CIS?
The Construction Industry Scheme is a collection of tax provisions created by the HMRC to make sure that the tax is charged appropriately on payments between contractors and subcontractors in the construction industry.
Under CIS:
- Contractors deduct money from a subcontractor’s payments and pass it to HMRC.
- These deductions count as advance payments towards the subcontractor’s tax and National Insurance bill.
The scheme applies to most construction work in the UK, including site preparation, building work, alterations, repairs, decorating, and demolition. Even if your business is based overseas, you may need to register if you carry out construction work in the UK.
CIS roles: Contractor vs Subcontractor
You can be:
- A contractor – if you pay other businesses or individuals for construction work, or if your business spends more than £3 million a year on construction.
- A subcontractor – if you do construction work for a contractor.
- Both – many businesses are both contractors and subcontractors at the same time.
Your CIS responsibilities depend on which role (or roles) you have.
Registering for CIS
As a sole trader
If you’re a sole trader subcontractor:
- Register as self-employed with HMRC if you haven’t already.
- Have your UTR and National Insurance number ready.
- Register for CIS online or by calling HMRC.
Once registered, contractors will verify you with HMRC to determine your deduction rate.
Sole traders operating under the Construction Industry Scheme (CIS) will be required to comply with Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) starting from April 2026 if their annual gross income is over £50,000. This fundamentally changes how records are kept and submitted to HMRC.
As a limited company
If you run a limited company subcontractor:
- Make sure your company is registered with Companies House and for Corporation Tax.
- Have your company UTR, registration number, and PAYE reference (if applicable).
- Register your company as a subcontractor for CIS.
The contractor will verify your company’s CIS status with HMRC.
Deduction rates and payment types
Your deduction rate depends on your registration status:
- 20% deduction – the standard rate for registered subcontractors.
- 30% deduction – applied if you’re not registered.
- Gross payment status – no deductions; you’re paid in full and handle your own tax payments.
Gross payment status – What it means and how to get it
Gross payment status can help with cash flow since you receive the full payment amount. To qualify, you must:
- Show a good record of paying taxes on time.
- Meet minimum turnover requirements (usually £30,000 for sole traders or £30,000 per director for limited companies).
- Run your business through a bank account.
You can apply when you register for CIS or later. HMRC reviews your status annually and can withdraw it if you fall behind on your tax obligations.
How payment works in practice
If you’re a sole trader
When a contractor pays you:
- They deduct tax (unless you have gross payment status).
- They give you a CIS payment and deduction statement each month showing how much was taken.
- At the end of the tax year, you file a Self Assessment tax return. HMRC takes your CIS deductions off your tax bill, and if you’ve paid too much, you’ll get a refund.
If you’re a limited company
When a contractor pays your company:
- Deductions are made as above.
- You reclaim these deductions through your PAYE payroll system by submitting an Employer Payment Summary (EPS) to HMRC.
- The deductions reduce your PAYE and National Insurance liability. If you’ve overpaid, HMRC refunds you or offsets it against other tax you owe.
- You also submit your Corporation Tax return each year.
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Responsibilities if you’re a contractor
If you pay subcontractors (whether as a sole trader or limited company):
- Register as a contractor before you pay anyone.
- Verify subcontractors with HMRC to check their status.
- Deduct the correct tax from payments.
- Submit monthly CIS returns to HMRC.
- Give each subcontractor a monthly deduction statement.
- Keep clear records for at least three years.
If you’re both a contractor and a subcontractor
Many businesses work for main contractors and also hire their own subcontractors. In this case:
- You must meet all obligations for both roles.
- You may need to offset CIS you’ve suffered against CIS you’ve deducted from others.
- Correct record-keeping is critical to avoid penalties.
Record-keeping requirements
Good records make CIS compliance much easier and protect you if HMRC inspects your business.
You should keep:
- Invoices and receipts.
- CIS payment and deduction statements.
- Details of all subcontractors you’ve paid (names, UTRs, verification numbers, amounts paid, deductions made).
- Payroll records (for limited companies).
Penalties for non-compliance
HMRC can issue penalties if you:
- Fail to register.
- Submit returns late.
- Deduct the wrong amount.
- Don’t keep proper records.
For example, filing your monthly return late can result in penalties starting at £100, increasing the longer it’s overdue. Incorrect or missing deductions can lead to hefty tax bills and interest charges.
Key differences between sole trader and limited company CIS operation
Choosing between a sole trader and a limited company under the CIS affects how you’re paid, taxed, and managed. Knowing the key differences helps you stay compliant and make the best choice for your business.
| Feature | Sole Trader | Limited Company |
| Tax Filing | Self Assessment return | Corporation Tax return + PAYE filings |
| CIS Deductions | Offset against personal tax bill | Offset via PAYE |
| Admin | Simpler | More complex |
| Liability | Unlimited personal liability | Limited liability |
| Tax Planning | Fewer options | More flexibility |
Top tips for smooth CIS operation
- Register early – don’t wait until you start work.
- Apply for gross payment status if you meet the criteria.
- Check your statements – make sure deductions are accurate.
- Keep digital records – use accounting software that’s CIS-compliant.
- Stay on top of deadlines – late returns mean penalties.
- Work with an accountant who understands CIS.
Conclusion
Sole traders deal with CIS mainly through their Self Assessment return. At the same time, limited companies process CIS through PAYE before finalising Corporation Tax.
To succeed, you need to register properly, keep good records, and file on time. When you follow HMRC’s rules, your business stays compliant and your finances stay healthy.
Make CIS accounting easy with the specialised accounting services from Bradleys. We manage your deductions and compliance so you can focus on growing your business.
