What deductions do contractors make under CIS?
Answered 17 March 2026
Here is a comprehensive answer on the deductions contractors make under CIS:
What the law says
Under Finance Act 2004, s.61, contractors are placed under a statutory obligation to deduct tax at source from payments made to subcontractors for construction operations. The deduction applies to the labour element only — it must not be applied to the part of the payment representing the direct cost of materials to the subcontractor.
A "payment" under the scheme also excludes VAT and the CITB levy.
HMRC guidance / practice
Who is subject to deduction?
Contractors must verify each subcontractor with HMRC before making a first payment. Based on the verification outcome, there are three possible tax statuses:
| Status | Deduction |
|---|---|
| Gross (verified, meets conditions) | No deduction |
| Net – standard rate (verified, registered) | 20% deduction |
| Higher rate (unverified / unregistered) | 30% deduction |
The current rates (from 6 April 2007) are 20% for matched (verified) subcontractors and 30% for unmatched (unverified) subcontractors.
What the deduction is applied to
The deduction is applied to the full payment minus the direct cost of materials. "Direct cost" means what the subcontractor can demonstrate they directly paid for the materials, and those materials must specifically relate to the construction contract in question.
What is excluded from the gross payment
Contractors may also make separate deductions from amounts due to subcontractors in respect of:
- Public liability insurance
- CITB Levy
- Administrative charges
Since CIS applies to payments actually made (not amounts due), these deductions are ignored when determining the gross payment to be included in the monthly return.
Paying over deductions to HMRC
Contractors must account for the deductions made using the CIS scheme. From April 2007, contractors are required to submit monthly returns (form CIS300) setting out details of deductions made from subcontractors. Deductions made under CIS are separate from PAYE but are linked to the PAYE system for collection purposes.
Effect on subcontractors
CIS deductions operate as a pre-payment of the subcontractor's tax liabilities. They can be set against the subcontractor's PAYE and NIC liabilities, their own CIS liabilities, or their income/corporation tax liability.
Citation sources
On occasions, contractors may make deductions from payments due to subcontractors in respect of: public liability insurance CITB Levy (see CISR15110) administrative charges. Since CIS is tax machinery applied to payments made rather than payments due under a contract, CIS only applies to the payment actually made, net of these deductions. Payments in respect of those deductions should therefore be ignored when determining the ‘gross payment’ to be included in the monthly return.
about whether TOGL’s payments were within the CIS. On 21 September 2018, HMRC asked the accountant to provide details of “the payments made from the start of the build up to the date of registration.”. 9. After that telephone call, HMRC attempted for over a year to acquire enough information from TOGL to determine whether regulation 9 of the CIS Regulations applied. TOGL did not provide the information. 10. In September 2019 the HMRC officer who was conducting the investigation became aware that
Businesses or individuals operating in the construction industry are known as contractors or subcontractors. Contractors are responsible for making deductions of tax from payments made to subcontractors working in the UK construction industry. They need to account for these deductions using the CIS scheme. Deductions made under the CIS scheme are separate from PAYE but are linked to the PAYE system for collection purposes. The scheme is split into two parts; Pre 6 April 2007 and post 6 April 200
A ‘payment’ under the Scheme does not include the cost of materials, VAT, or an amount in respect of the Construction Industry Training Board (CITB) levy. Where a payment is made under deduction, and depending on the terms of the contract, the deduction should also apply to payments for subsistence and/or travelling expenses.
From April 2007, contractors are required to make CIS monthly returns (form CIS300) setting out details of deductions made from subcontractors, full details of this process are covered in DMBM524020. Details of the contractor monthly returns are recorded on the CIS system and collated at the end of the tax year. This means that the CIS36 is no longer required, so 2006-07 was the last year that the annual return CIS36 was required for contractors. Contractors, who are also employers, are still re
The rate of deduction under the Construction Industry Scheme (CIS) for subcontractors not holding gross payment status since 31st October 1988 has been as follows; Dates Rate of Deduction - 31st October 1988 to 30th June 1996 25% - 1st July 1996 to 30th June 1997 24% - 1st July 1997 to 5th April 2000 23% - 6th April 2000 to 5th April 2007 18% - 6th April 2007 to the present; - ‘matched’ subcontractor 20% - ‘unmatched’ subcontractor 30%
vin Gallagher (dated 6 January 2023) and Officer Linda Hale (of HMRC) (dated 18 August 2022), we did not hear any oral evidence in light of the jurisdictional point. In her witness statement, Officer Hale gives detail about the general law and principles in relation to the CIS. Officer Hale has worked for HMRC for 43 years and she has been a Technical Support Officer for the Construction Industry Functional Lead Team since November 2017. 26. Mr Gallagher was appointed a director of the Appellant
It is important that HMRC can establish the identity of subcontractors working within CIS and for this reason the contractor must provide specific information about the subcontractor(s) that they wish to pay under the Scheme. Namely, COTAX Unique Taxpayer Reference (UTR) Company Registration Number (CRN) Trading name known to HMRC The CIS system will check to see if the system holds a CIS record for the subcontractor. Where you do have such a record we will confirm to the contractor that the sub
A deduction made under the scheme should only be applied to that part of the payment not representing the direct cost of materials to the subcontractor (FA04/S61 (1)). ‘Direct cost’ means what the subcontractor can demonstrate what they directly paid for the materials. The materials used (which are deductible) must specifically relate to the construction contract to which the payment is being made. The materials therefore cannot relate to other construction contracts lying beneath the contract t