The complete guide to CIS and hiring subcontractors.
By Tom Ellis
Hiring subcontractors is the fastest way to scale a trade business without committing to the heavy financial burden of full-time PAYE employees. However, operating within the UK construction sector means you are legally bound by HMRC's Construction Industry Scheme (CIS).
As a contractor, CIS dictates that you must verify your "subbies" and deduct tax directly from their labour invoices before paying them. HMRC designed this system to prevent tax evasion in the trades, and they enforce it ruthlessly. Getting your verification checks wrong, miscalculating material deductions, or filing your monthly returns late will result in devastating financial penalties. This guide breaks down exactly how to navigate CIS safely.
The Verification Rule
You must legally verify every single subcontractor with HMRC online before making your very first payment to them.
Deduction Rates
Understanding when to deduct 20%, 30%, or 0% from a subbie's labour invoice, and why materials are strictly exempt.
The 19th Deadline
The immovable monthly legal requirement to file your CIS returns to HMRC and issue deduction statements to your workers.
CIS Deduction Rates & Materials Rules
When you receive an invoice from a subcontractor, you cannot simply pay the total amount. You must deduct tax at source and send it to HMRC on their behalf.
The Three Tax Rates
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20%Registered Subcontractors: The standard rate. If the subbie is registered with HMRC for CIS, you deduct 20% from their labour and pay it to HMRC.
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30%Unregistered Subcontractors: The penalty rate. If they are not registered with CIS, or HMRC cannot verify them, you must deduct a massive 30%.
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0%Gross Payment Status: Highly established subcontractors can apply for this status. If verified as Gross, you pay them 100% of their invoice with zero deductions.
The Golden Rule: Materials
You never deduct CIS tax from the cost of physical materials or heavy plant hire. The tax deduction only applies to the labour element of the invoice.
- Labour charge: £1,000
- Materials cost: £400
- Total Invoice: £1,400
- Deduct 20% from Labour ONLY: -£200
- What you pay the subbie: £1,200
- What you pay HMRC: £200
The HMRC Verification Process
You cannot simply ask a subcontractor what their tax rate is. You must verify them electronically through HMRC.
How to Verify
Before you pay a new subcontractor for the first time, you must log into your HMRC Government Gateway account (or use your commercial payroll software) and submit their Unique Taxpayer Reference (UTR) and National Insurance number. HMRC will instantly reply to confirm whether you should deduct 20%, 30%, or 0%.
Issuing Payment Statements
Within 14 days of the end of each tax month (by the 19th), you are legally required to give every subcontractor a Payment and Deduction Statement (PDS). This works like a payslip, proving to the subbie exactly how much tax you have withheld and sent to HMRC on their behalf so they can offset it against their self-assessment.
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CIS & The VAT Domestic Reverse Charge
Introduced to combat VAT fraud, the "Reverse Charge" rules completely change how VAT is handled between contractors and subcontractors.
If you are VAT registered, and you hire a subcontractor who is also VAT registered, they do not charge you VAT on their invoice.
Instead, the subcontractor issues an invoice stating: "Reverse charge: Customer to pay the VAT to HMRC". You (the main contractor) must then declare both the input and output VAT on your own VAT return.
Important Exception: This only applies to business-to-business transactions within the supply chain. When you invoice the final homeowner (the "End User"), you charge VAT exactly as normal.
When does it apply?
- ✓ Both parties are VAT registered
- ✓ Both parties are CIS registered
- ✓ The work falls under standard CIS rules
- ✗ Does NOT apply to End Users
Do You Need Contracts for Subcontractors?
The biggest mistake main contractors make is hiring a subbie on a handshake. If they flood a house, walk off the job half-finished, or get injured on your site, a verbal agreement leaves you completely exposed. You must use formal Subcontractor Agreements.
The Master Subcontractor Agreement
A subcontractor is an independent business, not an employee. Therefore, you do not give them an employment contract; you give them a Contract for Services. This document should explicitly state the agreed day rate or price work, the scope of the job, and acknowledge that CIS deductions will be made. Crucially, it must include a "Right of Substitution" clause—stating they can send someone else equally qualified to do the work. This is vital for proving to HMRC they are genuine subcontractors and not disguised employees.
Who pays for mistakes?
Where does liability end? Ultimately, your contract is with the homeowner. If your subcontractor makes a massive mistake, the homeowner will sue you, not the subbie. Your Subcontractor Agreement must contain a Defects Liability clause, explicitly stating that the subcontractor must return to rectify any of their defective work at their own expense and on their own time.
Public vs. Employer's Liability
You must demand proof of a subcontractor's Public Liability (PL) Insurance before they step on site. However, insurance law differentiates between "Bona Fide" subcontractors (who supply their own materials, tools, and PL insurance) and "Labour-Only" subcontractors (who just turn up with hand tools to work under your direction). For Labour-Only subbies, your own Public Liability is rarely enough; you are legally required to hold Employer's Liability Insurance to cover them if they get injured.
Health & Safety Liability
You cannot contract out of your health and safety responsibilities. Under the CDM Regulations 2015, if you are the Principal Contractor running the site, you are responsible for site safety. Subcontractors must sign your site induction register, RAMS (Risk Assessments and Method Statements), and agree to wear required PPE. If they refuse to sign, do not let them start work.
The Subcontractor Onboarding Checklist
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Red Flags: Disguised Employment & Penalties
HMRC aggressively targets trade businesses that abuse the CIS system to avoid paying holiday pay and National Insurance.
False Self-Employment (IR35)
You cannot simply call someone a "subcontractor" if they act exactly like an employee. If they work for you 5 days a week exclusively, drive your branded van, use your tools, and cannot send a substitute to cover their shift, HMRC will classify them as an employee. You will be heavily fined and forced to back-pay their holiday and NI contributions.
Missing the 19th Deadline
Your monthly CIS return must reach HMRC by the 19th of every month. Even if you are just one day late, you get an automatic £100 fixed penalty. If it reaches two months late, it becomes £200, and scales up to thousands of pounds. Do not rely on memory; automate this with payroll software.
Forgetting "Nil Returns"
From April 2026, HMRC strictly reinstated the rule requiring "Nil Returns". If you are registered as a CIS contractor but didn't pay any subcontractors in a specific month, you must still submit a return stating £0. Failing to file a Nil Return triggers the exact same £100 late penalties as a regular return.
Paying Cash in Hand
Paying labourers "off the books" in cash to avoid CIS deductions is illegal tax evasion. Under the new HMRC rules, if you are caught knowingly participating in deliberate non-compliance, you can instantly lose your own Gross Payment Status and face severe tax-geared penalties. Always leave a paper trail.
Frequently Asked Questions
Do I have to pay CIS tax if I hire an architect or surveyor?
No. CIS only applies to manual construction work, site preparation, repairs, and decorating. Professional services like architecture, surveying, scaffolding hire (without labour), and carpet fitting are strictly exempt from the Construction Industry Scheme.
What happens to the 20% tax I deduct from my subbies?
The 20% you withhold is not kept by your business. You must pay it directly to HMRC by the 22nd of the month (if paying electronically). HMRC holds this money as an advance payment toward the subcontractor's eventual personal income tax and National Insurance bill for the year.
Am I liable if a subcontractor gets injured on site?
Yes. If you bring "labour-only" subcontractors onto a site and direct their work, you are legally responsible for their health and safety. You must ensure your business holds Employer's Liability Insurance, as standard Public Liability Insurance will not cover a subcontractor claiming against you for an on-site injury.
Do I need to register for CIS if I only work for private homeowners?
No. If your trade business only ever works directly for domestic homeowners (private householders), you do not fall under the Construction Industry Scheme. CIS only applies to business-to-business transactions—specifically when a main contractor hires you, or when you hire another subcontractor to complete construction work on a site.
Should I deduct CIS tax from a subcontractor's travel and fuel expenses?
Yes. This is a very common trap. While physical building materials and heavy plant hire are strictly exempt from CIS deductions, HMRC rules state that you must deduct CIS tax from any money you reimburse a subcontractor for their travel, fuel, accommodation, or food. These are treated as part of the overall taxable cost of their labour service.
How do I get CIS Gross Payment Status (0% tax deduction)?
To stop contractors deducting 20% from your invoices, you can apply to HMRC for Gross Payment Status. To qualify, your trade business must pass a strict turnover test (currently £30,000 per year for a sole trader, or £30,000 per director for a limited company), have a flawless record of filing returns and paying taxes on time over the last 12 months, and operate through a UK bank account.
What happens if I make a mistake on my monthly CIS return?
If you realise you have under-reported or over-reported figures on a submitted CIS return, you must correct it immediately through your HMRC online employer portal or commercial payroll software. If HMRC discovers the error during a compliance check and determines it was careless or deliberate, you can face severe financial penalties based on a percentage of the missing tax, on top of having to pay the tax back immediately.
Can a subcontractor claim holiday pay or sick pay?
No. Genuine self-employed subcontractors operate as independent businesses. They are not entitled to statutory holiday pay, statutory sick pay (SSP), or pension auto-enrolment. If they demand these rights, they must be legally transitioned onto a PAYE employment contract.
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