A job comes in bigger than you can handle alone. You bring in a plasterer you have known for years, he does four days, he invoices you £3,600, you pay it. Nothing about that feels like a change of status. It is one.
The Construction Industry Scheme does not care about your size or your legal form. It cares about one thing: whether you pay someone else to do construction work. The moment you do, you are a contractor under the scheme, with registration, verification, deduction, filing and reporting duties that started before the payment left your account. Nobody tells you. The first contact is usually a penalty notice.
Who is a contractor
Two groups fall inside the scheme.
- Mainstream contractors. Anyone whose business includes construction and who pays subcontractors to carry out construction operations. A sole trader roofer paying a labourer is squarely in this group. So is a joiner subcontracting the electrics.
- Deemed contractors. Businesses outside construction altogether that spend more than £3 million on construction operations in any rolling twelve-month period. This catches landlords, retailers and manufacturers running a fit-out programme, and the obligations are identical once the threshold is crossed.
Being registered as a subcontractor yourself does nothing here. They are two separate registrations with two separate sets of duties, and most trades who get caught out are already registered as subcontractors and assume that covers it.
Register before the first payment, not after
You must register as a contractor with HMRC before you make the first payment to a subcontractor. Registration gives you a contractor scheme, which runs on the PAYE side of HMRC's systems even though nobody is on your payroll. Once it exists, it generates a filing obligation every single month, whether or not you pay anyone — which is a detail we will come back to, because it is where the penalties come from.
Verify every subcontractor before you pay them
Verification is a check with HMRC that tells you which rate to apply to that specific person. There are three answers:
- 0% — gross payment status. Pay the invoice in full and deduct nothing.
- 20% — the standard rate for a registered subcontractor.
- 30% — the higher rate, where the subcontractor is not registered or HMRC cannot match the details you gave to the record it holds.
Guessing is not an option, and neither is copying whatever the last contractor did. If you apply 20% to someone HMRC would have told you was on 30%, the shortfall is yours to make good, not theirs. Verification takes minutes through HMRC's CIS online service and gives you a verification number to keep.
The most common cause of an unexpected 30% is a mismatch rather than genuine non-registration — a trading name given where HMRC holds a personal name, or a mistyped Unique Taxpayer Reference. If a subcontractor comes back at 30% and swears they are registered, that is usually the reason, and it is worth five minutes on the phone before you deduct an extra 10% of their labour.
Deduct from labour only. This is where the money goes wrong.
The deduction applies to the labour element of the invoice, not the invoice total. Before you apply the rate you strip out VAT, the cost of materials the subcontractor paid for, consumable stores, plant hire for the job, fuel used on site, and any manufacturing or prefabricating cost.
Correct deduction: 20% × £2,700 = £540. You pay him £3,060 and send £540 to HMRC.
Deducting on the full invoice instead: 20% × £3,600 = £720. You have taken £180 too much off one invoice, and he has to wait until his tax return to see it again.
Had he verified at 30%: 30% × £2,700 = £810, and he receives £2,790.
Materials have to be genuine and the subcontractor has to have actually paid for them — you are entitled to ask for the invoices, and you should, because an inflated materials figure is a well-worn way of dodging the deduction and the liability for getting it wrong sits with you.
The month has two dates, and they are three days apart
CIS runs on tax months, which start on the 6th and end on the 5th. Everything is measured from the 5th.
The 19th is the filing date. Your monthly return, the CIS300, has to reach HMRC by the 19th of the month following the tax month, listing every subcontractor you paid and what you deducted. The same date carries a second duty: each subcontractor must have a payment and deduction statement within 14 days of the tax month ending, which lands on the 19th too. That statement is the only proof they have when they claim the money back, and failing to issue them is the fastest way to lose a good subcontractor.
The 22nd is the payment date, when the deductions have to be with HMRC if you pay electronically. If you still pay by post it is the 19th.
The return also carries a declaration on employment status: that you have considered whether each person listed is genuinely self-employed, and that you have verified everyone who needed verifying. Making that declaration carelessly carries a penalty of up to £3,000 on its own, separate from anything else.
Quiet month? You still file.
This is the trap that generates most of the penalties we see. Once you have a contractor scheme, the obligation is monthly and permanent. If you paid no subcontractors in a tax month you must either file a nil return or tell HMRC the scheme is inactive, which pauses the requirement for up to six months at a time.
Doing neither is a missed return, and a missed return is £100 whether the month was busy or empty. A roofer who subcontracts heavily in summer and works alone through the winter can accumulate five £100 penalties for months in which he paid nobody anything.
The penalty arithmetic, in pounds
The ladder runs per return: £100 the day after the deadline, a further £200 at two months, and at six months the higher of £300 or 5% of the deductions on that return, with another tax-geared penalty at twelve months.
Months 1–3, now over six months late: £100 + £200 + £300 = £600 each → £1,800
Months 4–6, three to five months late: £100 + £200 = £300 each → £900
Months 7–8, one to two months late: £100 each → £200
Penalties: £2,900. On top, HMRC can pursue the £4,320 of deductions from the contractor, because the obligation to deduct was his.
There is one piece of relief and it is narrower than it sounds. A new contractor — someone who has never filed a CIS300 before — has the total of the £100 and £200 fixed penalties capped at £3,000. In the example above the fixed penalties come to £2,000, so the cap does nothing at all, and the £900 of six-month penalties sits outside it regardless. The cap stops a catastrophe; it does not stop a bill.
Is he a subcontractor or an employee?
CIS is a tax deduction scheme, not an employment status test, and operating it correctly is no defence if HMRC decides the person was really employed. The questions are the familiar ones: who controls how and when the work is done, whether he can send a substitute, whether he provides his own tools and transport, whether he carries any financial risk, and whether he works for anyone else.
A labourer who turns up to your jobs five days a week, uses your van and your tools, takes his instructions from you and works for nobody else is an employee wearing a subcontractor's invoice. Getting that wrong costs the employer's National Insurance, the pension contributions and the holiday pay for the whole period, not just the future. Our post on taking on your first employee sets out what that actually costs per hour.
The VAT twist: the domestic reverse charge
If you and your subcontractor are both VAT registered and the work falls within CIS, the subcontractor does not charge you VAT. You account for it yourself on your own return, showing the output tax and reclaiming the input tax in the same box set, so no money moves. The exception is where you are an end user — typically the final customer having work done on their own property — in which case normal VAT rules apply and the subcontractor charges as usual.
Two practical consequences. Subcontractors receive noticeably less cash than they used to, which is a cashflow shock the first time it happens. And a subcontractor's invoice that charges you VAT on reverse-charge work is wrong, so paying it means paying 20% you cannot reclaim.
What to do this week
- Work out whether you have already paid anyone for construction work this tax year. If you have, you were a contractor from that date.
- Register as a contractor with HMRC now. Late registration is much cheaper than late returns.
- Verify every subcontractor you use, including the ones you have used for years, and file the verification numbers somewhere you will find them.
- Ask each of them for invoices that separate labour from materials. An invoice with one number on it cannot be deducted from correctly.
- Put the 19th and the 22nd in the calendar as recurring monthly reminders, and keep them there through quiet months.
- Set up payment and deduction statements as a template so they go out with the payment rather than being chased for.
- If you already have unfiled months, get them filed rather than waiting to be found. Penalties stop growing at the point the return arrives.
If you are on the other side of this — being paid under CIS rather than paying — our post on CIS refunds for subcontractors covers what you are owed and how to get it back, and our CIS subcontractor page explains how we handle it.
Where we help
We register contractor schemes, verify subcontractors before they are paid, split labour from materials on invoices that arrive as one figure, file the CIS300 every month including the quiet ones, issue the deduction statements, and deal with HMRC where months have already been missed. It runs alongside the bookkeeping rather than as an extra, from £19 + VAT a month. Get started.
