What is the Construction Industry Scheme (CIS)?
If you are self-employed in the building or construction trade, then you should pay tax under the Construction Industry Scheme (CIS).
This page explains what the CIS is, how you register for the CIS and how your tax position works under the CIS.
The CIS is a HMRC scheme under which if you work for a contractor in the construction industry, (so not as an employee), but for example as a self-employed individual, then the CIS rules mean that the contractor is usually obliged to withhold tax on its payments to you, at either 20% if you are ‘registered’ or 30% if you are not.
This is different from other self-employed individuals, who normally receive their payments gross, which means no tax is deducted.
Not everyone who works in the construction industry is self-employed. If you work in the construction industry, you should consider your employment status in the same way as everyone else.
It is important to be clear that even though a contractor is withholding tax on payments made to you (and you will receive payslips) – you are not being treated as an employee and so will not be entitled to any of the employment rights that usually go along with being an employee.
The CIS covers more than what you may typically think of as building and civil engineering work, for example it includes work in demolition, site clearing, repairs and decorating, and installing power systems. The HMRC CIS manual details what work is included within the Construction Industry Scheme.
Note that if you supply construction industry type services directly to a homeowner (so not to a contractor), then this would not fall under the CIS and the customer would pay you gross on production of your invoice.
Do all workers in the construction industry automatically pay tax under the CIS?
No – you should only pay tax under the CIS, if you are genuinely self-employed.
Contractors have an obligation to decide if their workers are employed or self-employed.
Whilst most contractors would no doubt prefer to take on workers on a self-employed basis (as this means less cost/responsibilities/paperwork etc.), self-employment is a question of fact, not choice. You can read more about deciding employment status on our website.
In situations where a person works exclusively for one contractor and does not have the risks of running a business, then they are likely to be an employee, rather than self-employed – even if the work arrangement is only for a very short time, or they have an existing Unique Taxpayer Reference (UTR) or they provide their own small tools.
If you are regarded as an employee of the contractor, then income tax (and National Insurance contributions) will need to be withheld at source by the contractor under the Pay As You Earn system. If you an employee but are then passed to an umbrella company or another intermediary to be paid, then you should read our dedicated guidance.
How do I know whether to register under the Construction Industry Scheme?
There are two components of the Construction Industry Scheme (CIS), one is being a ‘contractor’ and one being a ‘subcontractor’.
If you are engaging other self-employed workers doing construction work then you are a contractor and must register under the CIS. There is more information on how to register for the CIS as a contractor on GOV.UK.
As a low-income self-employed worker, it is more likely that you will be engaged, or taken on, by a contractor to perform some construction work. This will mean you are a subcontractor. If you are a subcontractor then you can choose whether or not to register under the CIS.
GOV.UK explains how you can register for the CIS as a subcontractor and what information you will need to be able to register. There are different methods depending on whether or not you have already registered as self-employed and if you are working for yourself as a sole trader or through a different trading entity, such as a partnership or a limited company.
Note that registration under the CIS is in addition to registration as self-employed for Self Assessment, not instead of registering as self-employed. This means for those new to both self-employment and the CIS, there are two separate registrations. However, both can be done at the same time.
It is also possible to be both a contractor and subcontractor at the same time. For example, if Ryan, an electrician, is contracted by a local builder to carry out some work, then his work would fall under the CIS. If he himself subcontracted out some elements of his work to his electrician friend Jenny because he wanted to get the job done quicker, then he must also register as a contractor and pay Jenny under the CIS.
If you decide not to register under the CIS then the contractor must deduct and withhold 30% of the amount of your invoices for your work (but not any amounts you invoice for direct expenses such as materials or tool hire, etc.). So, you will be paid 70% only, this is shown in the example below.
Oscar is a self-employed bricklayer. He has been hired by Builders Ltd to work on a site where they are building five new houses. Oscar invoices monthly, and his most recent invoice shows the following:
|Labour 20 days @£200 per day||£4,000|
As Oscar is not registered under the CIS, Builders Ltd must deduct 30% of the gross income from the payment to Oscar and so Oscar receives £2,800. The balance of £1,200 is paid by Builders Ltd to HMRC on Oscar’s behalf.
What happens if I register for the Construction Industry Scheme (CIS)?
If you decide to register for the CIS then the contractor must deduct and withhold 20% of the amount of your invoices* for your work and any travel expenses (excluding any amounts you invoice for VAT and materials and tool hire, etc as you should be paid 100% of these costs without any CIS deductions withheld).
*Note, that ‘self billing invoices’ are quite common in the construction industry – rather than you issuing an invoice for your services, the contractor raises a self-billing document and forwards a copy to you with your payment (the idea is that this makes invoicing easier where the contractor, rather than the worker, determines the pricing). You should always check ‘self billing invoices’ to make sure that they agree to your records and what you expected to be paid.
The 20% deduction is then paid by the contractor to HMRC who will then treat it as an advance payment towards your income tax and National Insurance contributions (NIC) for the particular tax year, as shown by your Self Assessment tax return. We explain how the withheld tax payments work with your tax position in the section, how is tax paid under the Construction Industry Scheme (CIS)?
You will then receive 80% of your invoice paid directly to you, according to your agreed invoice terms, along with the full amounts for any additional costs, such as materials. The example, Lee, below shows how this works.
The advantage of registering under the CIS is that the contractor only withholds deductions of 20% instead of 30% if you decide not to register (see the example of Oscar above).
Also, if you register and your tax affairs are up-to-date then you can apply to HMRC to have gross payment status, which will allow the contractor to pay you without making any deductions at all, so you should be paid 100% of your invoices. GOV.UK explains the conditions you must pass for HMRC to agree to your application for gross payment status.
How is tax paid under the Construction Industry Scheme (CIS)?
Under the CIS, contractors are required to check whether workers are ‘registered’ with HMRC. In order for the contractor to do this, they will need your Unique Taxpayer Reference (UTR) and National Insurance number.
As explained above, if you are a subcontractor, the payments you receive under the CIS may be subject to tax deductions – 20% for registered subcontractors; 30% for subcontractors not registered with the scheme. If you are a registered subcontractor and approved for gross payment status, then no deductions should be made under the CIS.
Any amounts withheld by the contractor will be paid to HMRC as advance payments towards your individual income tax and National Insurance contributions (NIC) bill for the relevant tax year.
If you are a self-employed subcontractor then you will usually need to complete a Self Assessment tax return. The only time you will not need to complete a tax return is if you are eligible for full relief under the trading allowance and decide it is beneficial to claim it (so your total trading income before expenses from any self-employment, miscellaneous income and casual income is less than £1,000 in the tax year).
When you complete your tax return you will need to include your total sales income, so the amount that you have invoiced, not the amount you received after the CIS deductions. This is the case even if your invoice includes amounts for things like materials, tool hire etc. Your tax return must also include any business expenses that are to be deducted from your self-employed income to arrive at your self-employed profit.
The amount of tax that has been deducted under the CIS should be entered in box 38 on page SES2 of the self-employed (short) pages and box 81 on page SEF4 of the self-employed (full) pages. This will mean that when your tax and NIC is calculated the advance payments that have been made through CIS deductions will be taken into account. We show how this works in the example of Lee, below.
Lee lives in England, he is registered as a self-employed CIS subcontractor but is not using the gross payment scheme. He prepares his accounts for his tax return using the accruals basis. During the 2019/20 tax year, Lee invoiced the following:
|Labour (Lee’s time working)||£18,000|
Lee is paid the following during the 2019/20 tax year:
Lee receives monthly statements from his contractor showing what he has been paid and what CIS deductions have been withheld. Lee has 20% CIS deductions (so £18,000 x 20%= £3,600) withheld by the contractor on his own work which means Lee is paid £14,400, but Lee is paid for all of his materials and tool hire costs without any CIS deductions.
When Lee is completing his 2019/20 tax return using HMRC online he will include the following:
|Turnover: takings, fees, sales or money earned by your business||£21,300 (£18,000 + £2,500 + £800)|
|Total allowable expenses (Lee has other business expenses of £3,000 in addition to the tool hire and materials)||£6,300 (£3,000 + £2,500 + £800)|
|Deductions on payment and deduction statements from contractors - construction industry subcontractors only||£3,600|
Lee’s tax and NIC for the 2019/20 tax year is calculated automatically as shown below:
|Profit from self-employment||£15,000|
|Minus Personal Allowance||£12,500|
|Income tax @20%||£500|
|National Insurance contributions|
|Class 2 (£3 x 52 weeks)||£156|
|Class 4 (£15,000 less £8,632 x 9%)||£573.12|
|Total tax and NIC due||£1,229.12|
|Minus tax deducted: CIS||£3,600|
|Income tax overpaid||£2,370.88|
As can be seen, Lee is due a refund as he has overpaid tax and NIC through the CIS deductions withheld by the contractor. We explain about overpayments of tax through the CIS in the question below.
Lee’s tax position, (of overpaying tax through the CIS deductions and being due a refund), is common to many self-employed sole-traders who are registered for the CIS but do not have gross payment status. It usually arises because CIS deductions are based on sales income and therefore do not take account of the personal allowance or business expenses. (On the other hand, your Class 2 and Class 4 NIC liability will eat up some of your refund).
Devolved administrations: Scotland and Wales
Devolution of some tax powers means that Scotland now sets its own rates of tax, Scottish income tax, and Wales has introduced the partial devolution of income tax, the Welsh rate of income tax, in the 2019/20 tax year.
Will I get payslips?
Yes – at least one statement must be provided by the contractor each tax month and within 14 days of the end of the tax month (a tax month runs from 6th of one month to the 5th of the next).
The statement must show the contractor's name and reference, details of the payment(s) made, the cost of any materials incurred and the deduction(s) made from the payment(s).
It is vital that you retain these statements (as well as details of your expenses – see below) as you will need them to do your tax return. If you do not keep adequate records or complete your tax return correctly or on time, you may have to pay a penalty.
If you have lost or missing statements, then you need to approach the contractor first to ask for them. HMRC will only provide you with information from their own systems where it can be shown that you have a genuine need and you’ve made every effort to get the missing information. The relevant HMRC contact details can be found on GOV.UK.
If all else fails, then it may be possible to work out the amounts you need for your tax return from looking at your bank statements. For example, if you are a CIS registered, labour-only worker and received £260 into your bank account, then as this is the amount after 20% tax, you can work out the ‘gross’ payment will have been £325 by doing the sum £260 x100/80. The difference - £65 - will be the amount of CIS withheld.
What about expenses?
When calculating the actual amount you pay tax and National Insurance contributions (NIC) on your tax return, you can take into account any expenses ‘wholly and exclusively’ paid out for the purposes of your business, such as a van expenses, tools and materials and administrative costs, including mobile phones.
You may be asked to provide evidence by HMRC that firstly, you actually incurred an expense and secondly, the expense was wholly and exclusively for your business. You should only include business expenses – if HMRC were to challenge the expenses included on your tax return and they were not accurate then you could be subject to penalties. We look at some common allowable and non-allowable expenses below.
In most cases it will be clear if something has been incurred wholly and exclusively for the purposes of your business, such as tools or materials. If you use something for both business and private purposes, a mobile phone or vehicle for example, you should keep evidence – mobile phone bills/mileage logs, etc. so that the appropriate proportion of business use can be identified. You may be able to claim a round sum amount equal to the ‘trading allowance’ for your business expenses instead of the actual business expenses you have incurred.
You can check our business expenses section for guidance on the types of expenses that you may be able claim in your tax return.
Typical expenses: examples
Expenditure on ordinary ‘civilian’ clothing worn during the course of a trade is disallowable. (However, a deduction for protective clothing is therefore normally allowed).
Food for sustenance
The cost of food and drink is not usually an expense incurred for business purposes, since everyone must eat in order to live. However, where occasional business journeys outside the normal pattern are made, modest expenses incurred in these circumstances, for example, for a sandwich away from home, may be deducted.
Having somewhere to live
The cost of domestic living accommodation is not allowable, although where a business trip necessitates one or more nights away from home, the hotel accommodation and reasonable costs of overnight subsistence may be deductible.
Use of home as office
There are two ways to calculate costs associated with using your home as an office, these are covered on our page: What business expenses are allowable?
Travelling to work
If you tend to work at one or two different sites during the year and there is a pattern – these one or two sites will be your normal working place and the cost of travelling between home and such places will likely be disallowed, as it is just ordinary commuting.
If your home is your business base (you may at times work there, keep your business records, materials, tools there etc.) and you work at many different sites during a year, any travel from home to the sites should be regarded as allowable travel.
Where you travel regularly at your own expense to a work ‘base’ (e.g. to receive instructions) and then are conveyed (at the contractor’s expense) to another location/s, you will have no allowable travel costs.
For more information on expenses, see this HMRC guidance.
Travel expense: Examples
Daniel works for an asbestos removal contractor. Currently he is mainly based in the Houses of Parliament, which are undergoing significant renovation – he will be there for the foreseeable future. As his presence there is ongoing and regular and predictable, his travel expenses will not be allowable. If Daniel does his own private asbestos removal jobs on the side – his travel expenses to them should be an allowable expense.
Luke is a subcontracted granite fitter. He fits granite worktops in different premises every day, but for Great Granite Ltd. He visits five or ten customers a week to measure or fit jobs. His contractor sends his job sheets by email and delivers granite directly to the site for Luke to fit. All of Luke’s travel expenses should be deductible (even though some jobs take him several days or weeks to complete – for example if he is fitting out a hotel).
How do I get a refund of overpaid tax under the Construction Industry Scheme (CIS)?
As shown in the example of Lee above, many subcontractors find themselves overpaying tax and National Insurance contributions (NIC).
If you are in this position then HMRC should automatically process your refund after you have completed and submitted your tax return, whether online or using a paper tax return. To get your refund in full, you must submit your Self Assessment tax return, and on time. It is also very important to remember to put the CIS tax deducted in – and in the correct box.
Our pages How do I claim back tax if I am taxed under the Construction Industry Scheme (CIS)? and How do I claim back tax if I complete a tax return? in the tax basics section explain in more detail how to claim a refund through your tax return or during the tax year if you cease trading in the construction sector.
Should I use an agent?
Completing and submitting a Self Assessment tax return can be complex and daunting. You may consider your only option is to pay to use a professional tax agent to assist you.
But you should be aware that when it comes to CIS, there can be problems with certain tax agents.
For example, they will often work for a percentage of your refund rather than for a fixed fee and so have a vested interest in maximizing the value of the claim (which they might do by inflating the tax refund due by including fictitious or non-tax-deductible expenses, for example).
While you may be tempted to turn a blind eye to such things, as this will mean a higher refund in the first instance, if HMRC check your tax return, it is you rather than the agent who will have to account for the underpaid tax, perhaps some years later. In such cases, on the basis that a fee will have been deducted already by the tax refund organisation, the HMRC debt may well be more than the financial benefit you received in the first place.
There can also be problems connected to the fact that often these agents will arrange for the CIS refunds to be paid to themselves, so that they can then deduct their fees before passing the balance to you.
You can find an excellent article on the charity TaxAid’s website ‘Inflated refunds and unscrupulous advisers’ which tells you more.
If you still want to use an agent, make sure you do your research. If possible, use one affiliated with a professional body.
What if I become a Limited (Ltd) company?
You may have heard about supplying your services through your own limited company as a way of saving some tax. However, setting up a limited (Ltd) company is very different from just being 'self-employed'.
There is information on running a limited company on our website. However this, generally, may not be a suitable way to trade for the lower-profit making business because of all the administrative considerations (and you should note that if you are supplying your services to primarily one contractor, then you may well fall under IR35/the off-payroll rules, which makes things even more complicated!)
If you do trade as a Ltd company, then you should be aware that the CIS applies to companies as well as to individuals. Where the CIS tax has been withheld at source from payments made to a company, then the deductions made may be set against the company's liabilities – any PAYE liabilities first (and where the subcontractor itself uses further subcontractors, CIS), then potentially other liabilities. For more information, see GOV.UK.
If you are trading as a limited company which has CIS deductions, then you should seriously consider obtaining professional assistance with your tax position.
What if I become VAT registered?
If you are VAT registered, then CIS deductions are not withheld on the VAT element of your invoice. So, if Lee in the example above, was VAT registered, he would have invoiced a total of £21,300 plus VAT of £4,260. The contractor would pay Lee £17,700 (£14,400 + £2,500 + £800) plus VAT of £4,260 = £21,960.
You may have heard that you can charge more for your services if you voluntarily register for VAT (or that you can bolster your earnings under the Flat Rate VAT scheme). But VAT is a complex tax – any ‘benefits’ there are of entering the VAT regime can be reduced or wiped out by additional administration, accountancy fees or penalties for getting things wrong. Voluntarily entering the VAT regime is therefore not something to be undertaken lightly – especially if it’s only a short-term role.
If you are thinking about becoming VAT registered voluntarily but have not yet done so, then we recommend you read our article Are you in low paid self-employment and considering becoming VAT registered? first.
In addition, from 1 March 2021, the government is rolling out a reverse charge initiative aimed at tackling fraud in the construction sector. This is caused when subcontractors charge VAT to their business customers, but ‘disappear’ before passing sums on to HMRC. The reverse charge will not apply to CIS services supplied to domestic customers, who will continue to be charged VAT, if applicable, in the usual manner.
The VAT reverse charge rules will apply to suppliers of specified services, reported under the CIS. Suppliers will no longer charge VAT to their contractors; instead the contractors receiving the invoices will self-assess the VAT by effectively charging themselves VAT on the subcontractors’ services on the VAT return in Box 1, and if able to recover VAT in full, the reverse charge VAT can be claimed on the same VAT return as a contra entry in Box 4. Please note that there may be an impact to cashflow for those businesses that normally receive VAT on their supplies and who use it as working capital until it is paid over to HMRC, so businesses should take steps to review their cashflow position.
What employment rights am I entitled to?
Construction industry workers are often classified as self-employed. This means that as far as employment rights go, they have very little protection under employment law.
There are many people working in the construction industry who should be being treated as an employee but are being treated as self-employed incorrectly.
Even where they are being treated as self-employed correctly, it is important to note that employment law status is different from tax law status. Tax law only recognises two types of status – employed and self-employed. For employment law, there are three potential statuses to consider – employee, ‘worker’ and self-employed.
A worker is basically someone who provides work or a service as part of someone else’s business. For example, an electrician working for a building contractor could be a worker for employment law purposes even if they are self-employed for tax law purposes.
A worker generally must carry out the work personally, rather than being able to send someone in his or her place. Their work arrangements tend to be midway between self-employment and employment in that they do not have the ‘master/servant’ relationship that an employee has with their employer; but neither are they entirely their own bosses, deciding how much to charge for their work, how much holiday to give themselves, and so on.
This is why ‘workers’ have a minimum set of employment rights to help protect them, including the right to be paid the minimum wage, to a workplace pension and to annual leave.
If you need help understanding your employment law status you can contact ACAS for confidential and free support and advice.
It is worth noting that even if you are classified as a ‘worker’ under employment law, you will not become entitled to statutory sick pay or any other statutory payments for that matter, for example statutory maternity pay, etc. unless you are also classified as an ‘employee’ for tax purposes. This is because the trigger for such payments is the existence of a ‘secondary contributor’ – that is, an employer to pay employer National Insurance contributions. Maternity allowance or employment and support allowance may be available instead from the Department for Work and Pensions (DWP).
There is more information on ‘worker’ status on GOV.UK.
Where can I find more information on the Construction Industry Scheme (CIS)?
There is more information on the CIS on GOV.UK including a section on What you must do as a CIS subcontractor? and Booklet 340 which contains detailed guidance for both contractors and subcontractors and on our website.
You may also be interested in our information on applying for a Construction Certification Scheme (CSCS) card.
You may find our guide to self-employment helpful as it explains the less common tax rules and contains more detailed information including a case study showing how to prepare accounts and what to include on your tax return.
|◀ National Insurance if you are self-employed|