The Construction Industry Scheme (CIS) is a cornerstone of tax administration in the UK construction sector. It is a set of rules governing how contractors must handle payments made to subcontractors for construction work. Far from being an additional tax, CIS is a withholding mechanism designed to ensure tax is collected from a sector where self-employment is common and to combat tax evasion.
For the 2026/27 tax year, a solid understanding of CIS obligations is essential for both contractors and subcontractors to ensure compliance and manage cash flow effectively.
What is the Construction Industry Scheme?
Under CIS, contractors must deduct money from a subcontractor’s payments and pay it directly to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance bill. The scheme applies to almost all construction work carried out in the UK, including site preparation, alteration, repair, extension, and demolition.
It is the contractor’s responsibility to determine whether a worker is genuinely self-employed and falls under CIS, or if they are an employee for whom the PAYE system must be operated.
Who Must Operate CIS?
The scheme places obligations on two main groups: contractors and subcontractors. Many businesses operate as both.
Contractors
A business must register with HMRC as a contractor if it meets either of these conditions:
- Mainstream Contractor: It pays subcontractors for construction work. This includes typical building firms and construction companies.
- Deemed Contractor: Its main business is not construction, but it spends more than £3 million on construction operations within any rolling 12-month period. This can include businesses like large retailers or property developers.
Subcontractors
A subcontractor is a business that carries out construction operations for a contractor. Subcontractors are not required to register for the scheme, but if they don’t, deductions will be taken from their payments at a higher rate.
The CIS Deduction Rates for 2026/27
When a contractor pays a subcontractor, they must first verify their status with HMRC. The verification determines the rate of deduction to be applied to the payment (excluding the cost of materials).
| Status | Deduction Rate | Who it applies to |
|---|---|---|
| Gross Payment Status (GPS) | 0% | Subcontractors who have successfully applied for and been granted GPS by HMRC. They receive the full payment without deduction. |
| Standard Rate | 20% | Subcontractors who are registered for CIS but do not qualify for Gross Payment Status. |
| Higher Rate | 30% | Subcontractors who are not registered for CIS or cannot be verified by the contractor with HMRC. |
These deductions must be paid over to HMRC by the contractor, typically on a monthly basis.
Achieving Gross Payment Status (GPS)
For subcontractors, achieving Gross Payment Status is highly advantageous as it means no deductions are taken, significantly improving business cash flow. To qualify for and retain GPS, a subcontractor must pass three stringent tests set by HMRC.
1. The Business Test
The subcontractor must demonstrate they are running a business that operates primarily in the UK construction industry, through a business bank account.
2. The Turnover Test
The business must meet a minimum turnover threshold. For the 2026/27 tax year, the net construction turnover for the last 12 months must be at least:
- £30,000 for a sole trader.
- £30,000 for each partner in a partnership, or at least £100,000 for the whole partnership.
- £30,000 for each director of a company, or at least £100,000 for the whole company.
This turnover figure excludes VAT and the cost of materials.
3. The Compliance Test
The applicant must have a strong history of tax compliance. This test has been significantly strengthened recently and now requires compliance with:
- CIS obligations.
- PAYE and National Insurance payments.
- Self Assessment and Corporation Tax filings and payments.
- VAT filing and payment obligations..
From 6 April 2024, compliance with VAT obligations was added to the statutory compliance test for GPS. This change aims to tackle non-compliance across the sector and ensures only those with an excellent compliance record can benefit from gross payment status. There are, however, provisions that allow for minor compliance failures without jeopardising GPS.
Contractor and Subcontractor Responsibilities
| Role | Key Responsibilities |
|---|---|
| Contractor | • Register for the scheme before paying the first subcontractor. • Verify every subcontractor with HMRC. • Apply the correct rate of deduction (30%, 20%, or 0%). • Submit monthly CIS returns to HMRC, even if no payments were made (unless a nil-filing obligation is not in place). • Pay the deducted amounts to HMRC monthly. • Provide subcontractors with a payment and deduction statement. |
| Subcontractor | • Register for CIS to be paid at the 20% rate instead of 30%. • Keep accurate records of all payments received and deductions suffered. • When completing the annual Self Assessment tax return or Company Tax Return, declare all income and claim the CIS deductions suffered as a payment on account of the final tax and NI liability. |
Failure to comply with CIS rules can lead to significant penalties for both late filing of returns and late payment of deductions. For example, a failure to file a monthly return incurs an initial fixed penalty of £100, with further penalties accruing for continued failure. Late payment penalties are progressive, increasing with the number of defaults in a tax year.
For detailed legislative context, refer to the Finance Act 2004 (Part 3, Chapter 3) and the Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045). HMRC’s Construction Industry Scheme Reform Manual (CISR) also provides comprehensive guidance on the scheme’s operation.
References
- Construction Industry Scheme Reform Manual – CISR14020 – The Scheme: construction operations: scope of CIS at 1
- Construction Industry Scheme Reform Manual – CISR11080 – The Scheme: overview: what is covered by the Scheme? at 1
- Construction Industry Scheme Reform Manual – CISR11020 – The Scheme: overview: broad outline of the Scheme at 1
- Construction Industry Scheme Reform Manual – CISR11020 – The Scheme: overview: broad outline of the Scheme at 1
- Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045), s 7
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