Understanding CIS: A Guide for Contractors and Subcontractors

If you're working in the construction industry, you've probably come across the term CIS – the Construction Industry Scheme. Recently, we’ve had a few clients needing to register for CIS and set it up in their accounting software, so we thought it would be helpful to share what we’ve learned, especially when using platforms like FreeAgent and Xero.

What is CIS?

CIS is a set of rules introduced by HMRC to regulate how payments to subcontractors for construction work are handled. Under the scheme, contractors deduct money from a subcontractor’s payments and send it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance.

The scheme applies to most construction work in the UK – from site preparation and demolition to building, repairs, and decorating.

Contractor vs Subcontractor

A contractor is any business or individual that pays subcontractors for construction work. This could be a construction company, a property developer, or even a housing association.

A subcontractor, on the other hand, is someone who carries out construction work for a contractor. Subcontractors can be sole traders, partnerships, or limited companies. If you're working through a limited company, you can still register under CIS – just make sure you use the correct UTR (Unique Taxpayer Reference) number. We’ve seen cases where subcontractors used both their personal and company UTRs, which caused a lot of confusion and delays with HMRC.

Some businesses may act as both contractors and subcontractors, depending on the nature of their work.

Registering for CIS as a Subcontractor

To get started, you’ll need a UTR. If you don’t have one, register for Self Assessment on HMRC’s website and select “working as a subcontractor” when prompted. HMRC will send your UTR by post, usually within 10 working days.

Once you have your UTR, you can register for CIS online using your Government Gateway ID. You’ll need to provide your business details, including your trading name, UTR, National Insurance number (if you're a sole trader), company registration number (if you're a limited company), VAT number (if applicable), and your trading start date.

By default, you’ll be registered for net payment status, which means contractors will deduct 20% from your payments. If you’d prefer to receive payments without deductions, you can apply for gross payment status – but you’ll need to prove that you’ve met all your tax obligations.

If online registration isn’t an option, you can also register by post. Just fill out the relevant form and send it to HMRC. It’s worth noting that there’s no separate CIS number – your UTR acts as your CIS ID.

When you invoice a contractor, they’ll deduct either 20% (if you’re registered) or 30% (if you’re not) from your payment and send it directly to HMRC.

Common CIS Mistakes to Avoid

Over the years, we’ve seen a few recurring issues that can cause headaches for contractors and subcontractors alike. Here are some of the most common mistakes:

Using the wrong UTR number: This is especially common when subcontractors operate both personally and through a limited company. Mixing up UTRs can lead to misallocated payments and delays in tax processing.
Deducting CIS from materials: Contractors should only deduct CIS from the labour portion of an invoice. We've seen cases where deductions were mistakenly applied to the full invoice amount, including materials and VAT, which is incorrect and can lead to disputes.
Missing CIS return deadlines: Contractors must submit CIS returns by the 19th of each month. Late submissions can result in penalties, even if no payments were made that month.
Not verifying subcontractors: Before making payments, contractors must verify each subcontractor with HMRC to determine the correct deduction rate. Skipping this step can lead to incorrect deductions and compliance issues.
Incorrectly recording CIS deductions in accounts: Some businesses record the net payment as income, forgetting to account for the gross amount and the CIS deduction as a tax credit. This can distort financial reports and lead to under- or over-reporting of income.
Assuming CIS applies to all payments: Not all construction-related payments fall under CIS. For example, payments for architectural services or materials alone are not subject to CIS deductions. Misapplying CIS can cause unnecessary complications.

If You’re a Contractor

Contractors have a few more responsibilities under CIS. You’ll need to:

Register with HMRC as a contractor.
Verify each subcontractor with HMRC to determine the correct deduction rate (0%, 20%, or 30%).
Deduct tax from subcontractor payments – but only on the labour portion, not materials or VAT.
Submit monthly CIS returns by the 19th of each month, detailing payments and deductions.
Pay the deductions to HMRC by the 22nd of each month (or the 19th if paying by post).
Provide payment and deduction statements to your subcontractors.

For example, if your subcontractor invoices you on 30 September, that falls within the tax month of 6 September to 5 October. You’ll need to submit the CIS return by 19 October.

If you also run PAYE for employees, you’ll report and pay CIS deductions, PAYE tax, and National Insurance together in one monthly payment to HMRC. However, they’re tracked separately in your HMRC account.

How CIS Affects Your Accounts

For subcontractors, the deductions made by contractors are essentially prepaid tax. In your accounts, you should record the gross income (before deductions) as revenue. The CIS deductions are recorded as a tax credit – tax already paid. These are then offset against your corporation tax liability when you file your company tax return. If the deductions exceed your liability, you can claim a refund or apply it to other taxes like VAT or PAYE.

Contractors should record the gross amount payable to the subcontractor and the CIS deduction as a liability to HMRC. When you pay HMRC, reduce the liability accordingly and make sure your CIS returns match your accounting records.

Using Accounting Software for CIS

The good news is that accounting software has come a long way in supporting CIS. Both Xero and FreeAgent offer tools to help manage CIS deductions and submissions.

In Xero, the CIS contractor features are currently only available for limited companies. You can find more details on their support page: About Construction Industry Scheme (CIS) in Xero – Xero Central

FreeAgent also provides clear guidance for both contractors and subcontractors. You can check out their help articles:

CIS can seem complicated at first, but once you understand the basics and set up your systems correctly, it becomes much more manageable. Whether you're a contractor or a subcontractor, staying on top of your CIS responsibilities is essential to avoid penalties and keep your business running smoothly.

If you’re unsure about how CIS applies to your business or need help setting it up in your accounting software, feel free to reach out. We’re here to help you navigate the process and make sure everything is in order.

Annja Louca15 October 20252025

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