Definition
The Construction Industry Scheme (CIS) is a UK HMRC scheme under which contractors deduct money from payments to subcontractors for construction work and pass it to HMRC as advance tax. Deductions are 20 percent for registered subcontractors and 30 percent for unregistered ones. Subcontractors with gross payment status are paid in full.
Also called: CIS, CIS deductions, CIS invoice
Construction Industry Scheme in practice
The deduction applies only to the labour part of an invoice. Materials, VAT, and certain other costs are not subject to CIS, so subcontractors should show labour and materials as separate lines.
Before paying a new subcontractor, the contractor verifies them with HMRC to find out which rate to use. Each month it files a CIS return and gives the subcontractor a payment and deduction statement, which the subcontractor uses to claim the deductions against their own tax bill.
Most construction services between VAT-registered businesses in the CIS also fall under the VAT domestic reverse charge. The subcontractor's invoice then shows no VAT and a note that the customer must account for it.
Example
A registered electrician invoices 3,000 GBP of labour and 1,000 GBP of materials. The contractor deducts 20 percent of the labour, 600 GBP, pays 3,400 GBP, and sends a statement showing the 600 GBP deduction.
Frequently Asked Questions
Should my invoice show the CIS deduction?
Many subcontractors show the labour, materials, and the amount the contractor will deduct, so the expected payment is clear. The contractor's monthly statement is the official record of what was deducted.
How do I get paid without CIS deductions?
Apply to HMRC for gross payment status. You need to pass tests on your business turnover and tax compliance history. Once approved, contractors pay your invoices in full.
Related terms
- Withholding tax Withholding tax is an amount a client deducts from an invoice payment and pays directly to the tax authority on the supplier's behalf.
- Reverse charge Reverse charge is a VAT rule under which the buyer, rather than the seller, accounts for the VAT on a transaction.
- UTR number A UTR number, or Unique Taxpayer Reference, is the 10-digit reference HMRC issues to individuals who register for Self Assessment and to limited companies for Corporation Tax.
- VAT VAT (value added tax) is a consumption tax charged at each stage of the supply chain on the value added, used in the EU, UK, and more than 160 other countries.
- Progress invoice A progress invoice bills a portion of a larger project as work is completed, rather than one invoice at the end.
- Retention Retention, or retainage, is a percentage of each progress payment, commonly 5 to 10 percent, that a client withholds until a project is fully complete and accepted.
This page is for general information only and is not legal, tax, or financial advice. Rules change and vary by location, so consult a qualified lawyer or accountant about your situation.