Three rates, one calculation that almost everybody gets wrong, and the recovery route that catches out incorporated subcontractors. Prepared by a Chartered Management Accountant.
| Rate | Applies to | What the contractor must do |
|---|---|---|
| 20% | Subcontractors registered under the scheme whose details HMRC matches on verification | Withhold a fifth of the labour, pay it to HMRC, issue a deduction statement |
| 30% | Subcontractors who have not registered, or whose details HMRC cannot match against its records | Withhold three tenths of the labour until HMRC confirms a lower rate |
| Nil | Subcontractors granted gross payment status | Pay in full, but still report the payment on the monthly return |
The 20% and 30% figures have been unchanged since 6 April 2007, so an old reference is unlikely to mislead you on the rate itself. Everything else about the scheme has moved, which is where the trouble starts.
This is the part worth reading twice, because it is where money changes hands incorrectly. The rate never applies to the invoice total. It applies to what remains once the contractor removes:
What is left is, in substance, the labour. The contractor may ask for receipts supporting the materials figure, and where none exists is expected to estimate reasonably rather than ignore the exclusion.
A registered subcontractor invoices for a first-fix job. Say the figures are labour £2,400, materials they bought themselves £600, and a hired lift at £200. VAT is charged at the standard rate because the customer has confirmed it is an end user, so the reverse charge does not apply.
| Line | Amount | In the deduction base? |
|---|---|---|
| Labour | £2,400.00 | Yes |
| Materials | £600.00 | No |
| Plant hire | £200.00 | No |
| Net total | £3,200.00 | — |
| VAT at 20% | £640.00 | No |
| Invoice total | £3,840.00 | — |
| Deduction at 20% of £2,400 | £480.00 | — |
| Paid to the subcontractor | £3,360.00 | — |
Two comparisons make the point. Had the same subcontractor failed verification, the withholding would have been 30% of £2,400, or £720, and the payment £3,120 — a cash difference of £240 on one modest invoice. And had the contractor lazily applied 20% to the £3,200 net total, the withholding would have been £640 and the subcontractor short-paid by £160 on tax that was never due.
Pay others to do construction work and you register as a contractor, before the first payment. Do construction work for a contractor and you register as a subcontractor, before starting. Plenty of firms sit on both sides at once and have to do both.
The one that surprises people is the deemed contractor rule. A business with no construction trade at all is pulled into the scheme once its spending on construction operations exceeds £3 million in any rolling twelve-month period. That reaches property investors, retailers with a fit-out programme and manufacturers mid-expansion. Private householders paying for work on their own home are never contractors.
Work done outside the UK falls outside the scheme, as does employment under a contract of employment, where PAYE applies instead. Site services that are not construction — a canteen, security, site medical cover — are also outside it. Note too that from 6 April 2026 payments to local authorities and specified public bodies fall outside the scheme — that is payments made to them as subcontractor, not payments they make out.
Four changes land together, and two of them put money at risk for contractors who have done nothing wrong themselves.
These are stated as the position announced for 6 April 2026. Check the current HMRC guidance before relying on any of them for a specific contract.
Before a new subcontractor is paid, the contractor must put their details to HMRC and be told which rate to use, through HMRC's free CIS service or commercial software, which is required above fifty subcontractors. It needs its own UTR, accounts office reference and employer reference, plus the subcontractor's details: UTR and National Insurance number for a sole trader, company name, UTR and registration number for a company, nominated partner details and the partnership UTR for a firm.
Those details have to match what the subcontractor gave HMRC on registering, character for character. A trading name used instead of the registered company name, or a transposed digit in a UTR, produces a failure to match — and that means 30%, not 20%. Nobody is being penalised; the contractor mistyped. A subcontractor used before must also be re-verified if they have not appeared on a return in the current tax year or the two preceding it.
CIS runs on tax months from the 6th to the 5th. The monthly return has to reach HMRC by the 19th of the following month. The deductions themselves are payable by the 22nd, or by the 19th if paying by post. Deduction statements go to each subcontractor within fourteen days of the end of the tax month.
| How late | Penalty |
|---|---|
| 1 day | £100 |
| 2 months | A further £200 |
| 6 months | A further £300, or 5% of the deductions on the return, whichever is higher |
| 12 months | A further £300, or 5% of the deductions, whichever is higher |
| Over 12 months | Up to £3,000, or 100% of the deductions, whichever is higher, in the most serious cases |
These stack per return. A contractor who stops filing for a year faces not one sequence of penalties but twelve — which is how a small building firm ends up with a five-figure demand for paperwork rather than tax.
Here the two business structures part company completely, and it is where incorporated subcontractors most often go wrong.
A company sets the deductions suffered against its own employment taxes month by month: PAYE, employee and employer National Insurance, student loan repayments and any CIS it has withheld from its own subcontractors. The figures are reported through the Employer Payment Summary, and the company needs a record of the amounts set off. Where the deductions suffered exceed the liabilities in a period, the surplus is carried forward against later months in the same tax year — it cannot be refunded in-year or applied to other taxes, save where the company is in liquidation or administration. Only after the final submission for the tax year can what is left be repaid or set against Corporation Tax.
The common error is to leave the deductions on the balance sheet all year, pay the PAYE over in full each month, then try to reclaim the lot at the year end — cash out of the door for up to twelve months for no reason, with EPS filings that no longer agree with the records.
No set-off at all. The deductions are claimed as credit against the income tax and Class 4 National Insurance computed on the Self Assessment return, with the construction pages carrying the figures — and they do not belong on the employment pages. Where the deductions exceed the liability the excess is repaid; where they fall short, a balancing payment follows.
Being paid in full, with the tax settled through normal self-assessment or corporation tax, is worth a great deal to a labour-heavy business. Three tests have to be passed. The business test: genuine construction work carried on in the UK, operated through a bank account. The turnover test: net construction turnover of at least £30,000 for a sole trader, or £30,000 for each partner or relevant person, with an alternative aggregate threshold of £100,000 available to partnerships and companies. The compliance test: returns filed and tax paid on time across the preceding twelve months, with narrow tolerances for minor lateness.
Status is reviewed, and it can be taken away. Losing it is immediate and severe: a labour-heavy business goes overnight from banking all of its labour income to banking four fifths of it, with the rest held by HMRC until a return releases it. Keeping the compliance record clean is doing real financial work.
The two schemes sit on top of each other and pull in opposite directions on one point, which is why they get muddled. CIS strips materials out before calculating the deduction. The VAT domestic reverse charge does the opposite: where materials are supplied along with the construction service they form a single supply, and the charge applies to the full invoice value. Splitting the labour from the materials to keep the materials outside the charge is specifically not permitted. The reverse charge applies between VAT-registered businesses on supplies reported within CIS, and stops where the customer has confirmed in writing that it is an end user — a business not making an onward supply of those services.
A subcontractor is taxed on profit but suffers deductions on labour turnover, and in a low-margin year the deductions comfortably exceed the eventual liability. The money is not lost, but it sits with HMRC until a return reclaims it. A forecast treating invoiced revenue as cash is then wrong by the whole withholding, every month, in the same direction.
This page is general information about how the scheme operates. It is not advice on a specific contract, payment or status decision, and the treatment of a particular engagement turns on its own facts. We prepare bookkeeping, VAT returns, management accounts, year-end accounts and Corporation Tax for owner-managed companies on Xero or Sage, from £95 + VAT a month, with a catch-up rate of £450 + VAT per overdue year. We do not carry out audit or specialist tax advice; those are referred on.
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