A registered subcontractor has 20% deducted from labour payments, while an unregistered one loses 30% to the same contractor before any money changes hands [1]. That ten-point gap is the single clearest reason to register under the Construction Industry Scheme, and it applies from the very first invoice a subcontractor raises.
The Construction Industry Scheme, or CIS, is the framework HMRC uses to collect tax at source from payments that contractors make to subcontractors for construction work [2]. It touches sole traders, partnerships and limited companies across the building trades, and the registration route differs for each.
This article sets out who the scheme covers, why registration changes the deduction rate, how to register as each type of business, and how gross payment status lets a subcontractor be paid in full with no deduction at all. It also covers verification, the deductions contractors apply, and the record-keeping that keeps a CIS registration in good standing.
Key takeaways
- Registering as a CIS subcontractor lowers the deduction rate from 30% to 20% on qualifying labour payments.
- Gross payment status removes deductions entirely, so the subcontractor receives 100% of the invoice and settles tax through Self Assessment or Corporation Tax.
- Sole traders register through Self Assessment, companies use form CIS305, and partnerships register the partnership and each partner separately.
- Gross payment status depends on passing three tests: turnover, business and compliance, with VAT obligations now part of the compliance test from 6 April 2024.
- A contractor must verify a subcontractor with HMRC before the first payment, and the deduction rate returned depends on the subcontractor's registration status.
What the Construction Industry Scheme is and who it covers
Under CIS, a contractor deducts money from a subcontractor's payments and passes it to HMRC as an advance payment towards that subcontractor's tax and National Insurance [2]. The scheme does not decide employment status. Registration on CIS does not, by itself, make a worker self-employed, and the contractor remains responsible for establishing whether a given engagement is employment or self-employment [3]. Where the relationship is one of employment, the worker belongs on the payroll and outside CIS entirely.
The scheme rests on a simple distinction. Contractors pay for construction work, subcontractors carry it out, and many businesses are both at once because they take on work from one party and sublet part of it to another [6]. A business that sits on both sides must register in both capacities.
Contractors, subcontractors and deemed contractors
A contractor under CIS is anyone who pays for construction work in the course of a construction business. Private householders are not contractors, so a homeowner paying a builder to extend a kitchen sits outside the scheme [7]. Businesses whose main trade is not construction can still be pulled in as "deemed contractors" once their spending on construction operations passes a threshold, set at more than £3,000,000 in any rolling 12-month period [7].
A subcontractor is a business that carries out construction work for a contractor, whether by supplying its own labour, supplying the labour of others, or arranging for others to do the work and being answerable to the contractor for it [6]. That definition is deliberately broad, and it captures the labour-only trades that make up much of the sector's supply chain [1].
What counts as construction work, and what does not
Construction operations cover almost anything done to a building, structure, civil engineering work or installation in the UK, whether permanent or temporary [6]. Site preparation, demolition, bricklaying, roofing, plastering, decorating and the installation of heating, lighting and power systems all fall inside the scheme [7].
A narrower set of activities sits outside CIS. The professional work of architects and surveyors, and consultancy in building, engineering or interior and exterior decoration, is excluded [6]. So are ancillary services on site that are not construction by nature, such as running a canteen, hostel, medical, safety, security or temporary office facility [7]. A subcontractor whose work is entirely excluded does not need to register for CIS, though registering does no harm where the position is mixed.
Why registering as a subcontractor matters
Subcontractors are not legally required to register, but the cost of staying outside the scheme is immediate and mechanical [1]. A contractor paying an unregistered subcontractor must deduct at the higher rate of 30%, and that money leaves the payment before the subcontractor sees it [8]. Registration brings the rate down to 20%, and gross payment status removes the deduction altogether.
The three deduction rates map directly onto three registration positions, as the table below shows.
| Registration position | Deduction rate | What the subcontractor receives |
|---|---|---|
| Not registered for CIS | 30% | 70% of the labour element, deduction sent to HMRC |
| Registered for payment under deduction | 20% | 80% of the labour element, deduction sent to HMRC |
| Registered with gross payment status | 0% | 100% of the invoice, tax settled later |
Sources: deduction rates confirmed in HMRC guidance [8] and the subcontractor overview [1].
Every deduction counts as an advance payment towards the subcontractor's eventual tax and National Insurance bill, so an over-deducted subcontractor is not losing the money outright, only its use during the year [2]. For a business running on tight margins, that cash-flow cost is real. A subcontractor invoicing £40,000 of labour in a year gives up £12,000 in deductions at the higher rate against £8,000 at the standard rate, a £4,000 difference held by HMRC until the return is filed and any refund processed [4].
How to register as a CIS subcontractor
Registration happens once, and the method depends on the legal form of the business. In every case the subcontractor needs a Unique Taxpayer Reference (UTR), because HMRC uses it to match payments and deductions to the right record [9]. Modern UK payroll software is built around these same identifiers, which is why keeping the UTR, National Insurance number and company number consistent across every system matters from day one.
Registering as a sole trader
A sole trader who already holds a UTR can register for CIS online through the same Government Gateway account used for Self Assessment [9]. The online route registers the subcontractor for payment under deduction, the 20% position, and takes effect once HMRC has processed the application.
A sole trader without a UTR registers as a new business for Self Assessment and selects "working as a subcontractor" when prompted, which sets up Self Assessment and CIS at the same time [9]. The alternative paper route uses form CIS301 for individual registration [10]. The details supplied at registration, including the exact name and National Insurance number, are the details a contractor will later use to verify the subcontractor, so accuracy at this stage prevents mismatches down the line [11].
Registering as a limited company
A company registers as a subcontractor using form CIS305, which also allows it to apply for gross payment status at the same time [12]. The company provides its company name, company UTR and Companies House registration number, and these three identifiers become the verification key a contractor uses before paying [11].
Company directors running payroll for their own staff alongside subcontract work often manage both streams in one place. An HMRC-recognised SME payroll platform handles the PAYE and Real Time Information side for employees, while CIS deductions on subcontract income sit separately and are reclaimed through the company's own returns [13]. A limited company can register online or apply for gross payment status through the dedicated company registration service [13].
Registering as a partnership
A partnership carrying out construction work registers the partnership itself, and each partner also registers in their own right, because deductions and any refunds are tracked at both levels [6]. The partnership supplies its trading name and partnership UTR, and nominates a partner whose details anchor the record [11].
Businesses based outside the UK that carry out construction work here must also register, and HMRC operates a dedicated route for overseas subcontractors [14]. The territorial test is where the work is done, not where the business is based, so a foreign firm working on a UK site falls inside the scheme [14].
Gross payment status and the three qualifying tests
Gross payment status is the position most established subcontractors aim for, because it removes CIS deductions completely and lets the business hold its own cash through the year [5]. It is not granted automatically. HMRC confirms it only after a business passes three tests, and it can be withdrawn if the business later falls out of compliance [5].
The three tests examine turnover, the nature of the business, and the applicant's compliance history, as summarised below.
| Test | What it checks | Core requirement |
|---|---|---|
| Turnover test | Net construction turnover in the qualifying period | £30,000 per relevant person, or £200,000 for the whole business under the alternative test |
| Business test | That the business is genuine and UK-based | Construction work carried out in the UK, run largely through a bank account |
| Compliance test | Tax and filing history | All returns and payments, including VAT, met on time in the qualifying period |
Sources: turnover thresholds and test descriptions from HMRC guidance [5] and the CIS reform manual [15].
The turnover test
The standard turnover test asks the business to show net construction turnover of at least £30,000 in the 12 months before the application, measured on labour income excluding VAT and the cost of materials [15]. For a company controlled by five people or fewer, the threshold is £30,000 for each of them, so a company with three directors must show £90,000 [5].
An alternative turnover test helps larger firms clear the bar in a single step. A business with net construction turnover of £200,000 or more meets the requirement regardless of the number of partners or directors [5]. Because the figure is net of materials, a subcontractor supplying expensive plant or materials must strip those costs out before comparing against the threshold [15].
The business and compliance tests
The business test asks for evidence that the firm operates in the UK, carries out or arranges construction operations, and runs its affairs largely through a bank account [5]. It is designed to confirm the business is real and trading, rather than a shell created to route payments free of deduction [6].
The compliance test is where many applications stumble. During the qualifying period the applicant must have met all requests for information and complied with its tax obligations on time [5]. From 6 April 2024 the compliance test was widened to include VAT returns and payments, a change HMRC introduced to strengthen its hand against supply-chain fraud in construction [16]. The rules allow limited tolerance: a small number of VAT returns filed up to 28 days late, or a VAT payment under £100 settled within 14 days, do not automatically fail the test [16]. HMRC also brought a subcontractor's first gross payment compliance review forward from 12 months to 6 months, before reverting to the annual cycle [16].
Verification, deductions and getting paid
Registration is only half the picture. Before a contractor pays a subcontractor for the first time, it must verify that subcontractor with HMRC to confirm the correct deduction rate [11]. Verification returns one of the three positions: gross, standard 20%, or higher 30% where the subcontractor cannot be matched [8].
The contractor must also re-verify a subcontractor it has used before if that subcontractor has not appeared on a CIS return in the current or previous two tax years [11]. The details a contractor submits must match exactly what the subcontractor used to register, which is why a small discrepancy in a name or number can push an otherwise registered subcontractor onto the 30% rate by accident [11].
When the deduction is calculated, it applies only to the labour element. The contractor starts with the gross invoice and removes VAT, the cost of materials, consumable stores, fuel used other than for travelling, and plant hire before applying the rate [3]. A subcontractor should always break out materials clearly on the invoice, because bundling them into a single labour figure inflates the base the deduction is taken from [4]. The contractor then issues a payment and deduction statement, the CIS equivalent of a payslip, which the subcontractor keeps as proof of tax already paid [4].
Keeping a CIS registration in good standing
CIS is not a one-off form but a running obligation, and the businesses that keep gross payment status are the ones that treat compliance as routine [5]. Filing Self Assessment or Corporation Tax on time, keeping VAT current, and retaining every payment and deduction statement all feed the compliance test that HMRC revisits each year [16].
Subcontractors who also employ staff carry two parallel obligations: CIS on their subcontract income and PAYE on their own workforce. An HMRC-recognised payroll platform for small businesses keeps the employment side compliant with Real Time Information, while the CIS deductions suffered on subcontract work are set against the company's own liabilities [6]. For accountants handling several construction clients at once, a payroll bureau platform that tracks each scheme separately reduces the risk of a filing slip that would cost a client its gross status. Software platforms building construction tooling can embed the same compliance engine directly through an HMRC-recognised payroll API, so CIS and PAYE logic live inside the product their users already work in.
Anyone new to the mechanics of construction pay can start with the Moonworkers guide to payroll for construction and CIS before deciding which registration route fits the business.
Conclusion
Registering as a CIS subcontractor is a small administrative step with a large financial consequence, moving the deduction rate from 30% to 20% and opening the path to gross payment status and no deduction at all. The route differs by business type, but the underlying logic is the same throughout: HMRC wants clean, matched records, filed on time, so that tax collected at source lines up with the tax actually due.
As HMRC widens the compliance net, most recently by folding VAT into the gross payment test from 6 April 2024, the value of good record-keeping only grows. The subcontractors and contractors who invest early in accurate registration details and reliable, HMRC-recognised systems are the ones least likely to lose a favourable status to a preventable slip, and best placed as construction payroll moves steadily towards automated, integrated compliance.
Frequently asked questions
Do subcontractors have to register for CIS?
Registration is not compulsory, but an unregistered subcontractor has 30% deducted from labour payments rather than 20%, so most register to reduce the deduction [1]. Registering also allows a subcontractor to later apply for gross payment status and receive payments in full. A subcontractor whose work falls entirely outside the definition of construction operations does not need to register at all.
How long does CIS subcontractor registration take?
A sole trader with an existing UTR can register online, and the registration takes effect once HMRC processes the application [9]. A subcontractor without a UTR must first register for Self Assessment, which adds time because the UTR is issued by post before CIS can be completed [9]. Applying well before the first contract avoids being paid at the higher 30% rate in the meantime.
What is the difference between net and gross payment status under CIS?
Net payment status, also called payment under deduction, means the contractor deducts 20% from qualifying labour payments and sends it to HMRC as advance tax [8]. Gross payment status means no deduction is taken, so the subcontractor receives the full invoice and settles its tax through Self Assessment or Corporation Tax [5]. Gross status must be applied for and depends on passing the turnover, business and compliance tests.
Can a limited company get gross payment status under CIS?
Yes. A company applies for gross payment status on form CIS305 when it registers as a subcontractor, or later once it can meet the tests [12]. The turnover test for a company controlled by five people or fewer requires £30,000 of net construction turnover for each of them, or the business can use the alternative £200,000 whole-business threshold [5]. The company must also keep its Corporation Tax, PAYE and VAT obligations current to satisfy the compliance test.
Image prompt: A wide realistic landscape photograph of a mid-scale UK construction site in soft overcast daylight, two subcontractors in hi-vis vests and hard hats reviewing paperwork on a clipboard beside scaffolding, muted natural colours, shallow depth of field, documentary style, no text, no logos, shot on a 35mm lens.
