CIS bookkeeping: a complete guide for UK contractors and subcontractors

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax scheme operated by HMRC that applies to contractors and subcontractors working in the UK construction industry. Under CIS, contractors are required to deduct money from payments made to subcontractors and pass those deductions directly to HMRC. The deductions count as advance payments towards the subcontractor's tax and National Insurance obligations.

The scheme covers most construction work carried out in the UK — including site preparation, demolition, building, alterations, repairs, decorating, and installation of systems such as heating, lighting, and ventilation. It does not apply to architecture, surveying, or the delivery of materials.

Who is a contractor under CIS?

A CIS contractor is any business or individual that pays subcontractors for construction work. This includes:

• Building firms and construction companies
• Property developers and landlords who spend more than £1 million per year on construction over a three-year rolling period
• Government departments and local authorities
• Housing associations
• Businesses outside construction that spend significant sums on construction work

If you pay subcontractors to carry out construction work, you are likely a CIS contractor regardless of whether your primary business is construction.

CIS deduction rates explained

The deduction rate that applies to a payment depends on the subcontractor's status with HMRC:

The deduction applies only to the labour element of the payment, not to materials. If a subcontractor invoices £2,000 for labour and £800 for materials, the 20% deduction applies only to the £2,000 labour element — resulting in a deduction of £400, not £560.

Subcontractor verification

Before making a first payment to a subcontractor, contractors must verify the subcontractor's status with HMRC. Verification confirms whether the subcontractor is registered under CIS and what deduction rate to apply. You cannot simply assume a rate — each subcontractor must be verified before the first payment.

Verification is done through HMRC's CIS online service or via your accounting software if it has direct HMRC API access. Once verified, you don't need to re-verify the same subcontractor unless they stop working for you and then come back.

What happens if you don't verify?

If you pay a subcontractor without verifying them and apply the wrong deduction rate, you are liable for the difference. If you applied 20% when you should have applied 30% because the subcontractor wasn't registered, HMRC can pursue you — the contractor — for the shortfall. This is one of the most avoidable CIS penalties and one of the most common.

Monthly CIS returns — the CIS300

Every contractor must submit a monthly return to HMRC — the CIS300 — by the 19th of the month following the payment month. The return shows:

• Details of every subcontractor paid in the period
• The gross amount paid to each
• The materials cost if applicable
• The deduction made

If you made no payments in a month, you still need to submit a nil return — or inform HMRC in advance that you expect no payments for a specified period.

Penalties for late or incorrect CIS returns

Penalties are per return, not per subcontractor. A contractor with four late CIS300 returns in a year could face over £1,200 in penalties before HMRC starts looking at whether the deductions themselves were correct.

Deduction statements for subcontractors

Contractors must provide each subcontractor with a deduction statement for every payment made under CIS. This is not optional — subcontractors need the statements to reclaim their deductions through their Self Assessment tax return or claim a repayment if deductions exceed their tax liability.

The statement must show: the contractor's name and UTR, the subcontractor's name and UTR, the payment period, the gross payment, the cost of materials if applicable, and the amount deducted. It must be given to the subcontractor at the time of payment or as soon as reasonably practicable after.

CIS as a subcontractor — reclaiming deductions

If you are working as a subcontractor rather than a contractor, the 20% or 30% deductions taken from your payments are advance payments against your tax bill. They are not a final tax — they are credited against your Self Assessment liability at the end of the year.

If your total CIS deductions exceed your total tax and NI liability for the year, HMRC will repay the difference. This makes accurate bookkeeping critical for subcontractors — you need to know exactly how much has been deducted throughout the year to reclaim everything you are entitled to.

CIS and VAT — the domestic reverse charge

Since March 2021, most construction services between VAT-registered businesses are subject to domestic reverse charge VAT. This changes who accounts for the VAT — rather than the supplier (subcontractor) charging VAT and paying it to HMRC, the customer (contractor) accounts for it directly. The subcontractor does not charge VAT on the invoice; the contractor applies it and recovers it simultaneously on their own VAT return.

Getting this wrong — either by charging VAT when reverse charge should apply, or applying reverse charge when standard VAT should be used — creates VAT return errors that can take months to correct. See our separate guide on domestic reverse charge VAT in construction for a complete breakdown.

How bookd. handles CIS bookkeeping

CIS bookkeeping requires specialist knowledge that generalist bookkeepers often lack. bookd. handles CIS as a core competency — subcontractor verification, correct deduction calculation (labour vs materials split), deduction statement preparation, monthly CIS300 returns filed directly to HMRC via our production API, and domestic reverse charge VAT applied correctly to every invoice.

For accounting firms with construction sector clients, bookd. processes CIS bookkeeping under your brand as part of your white label arrangement. Fixed per-client pricing, 48-hour turnaround, direct HMRC filing.