What is the Construction Industry Scheme and how does it affect developers?

The Construction Industry Scheme, usually shortened to CIS, is one of the most misunderstood parts of the UK tax system, particularly for property developers. I regularly see developers caught out by CIS obligations they did not realise applied to them, often resulting in penalties, disallowed costs, and significant backdated tax bills.

Many people assume CIS only affects builders and subcontractors on site. In reality, property developers are very often classed as contractors under CIS, even if they never pick up a tool themselves. Understanding how CIS works, and how it applies to development activity, is essential if you want to stay compliant and avoid costly mistakes.

In this article I will explain what CIS is, how it works in practice, when developers fall within it, and what your obligations are if you are developing property in the UK. Everything here reflects current UK tax rules as applied by HM Revenue & Customs and guidance published via GOV.UK, combined with real world experience advising developers.

What is the Construction Industry Scheme?

The Construction Industry Scheme is a tax withholding system designed to collect tax from the construction sector.

Under CIS:

Contractors deduct tax from payments to subcontractors

The tax is paid to HMRC

Subcontractors receive credit for the tax deducted

The deductions count towards the subcontractor’s tax bill

The aim is to reduce tax evasion in construction, where subcontracting and self employment are common.

CIS does not replace income tax or corporation tax. It is a method of collecting tax in advance, similar in concept to PAYE, but applied to construction payments.

Who CIS applies to

CIS applies to two main groups:

Contractors

Subcontractors

Understanding which role you fall into is critical, because the obligations are very different.

Who is a contractor under CIS?

A contractor is anyone who:

Pays subcontractors

For construction work

As part of a business

This includes:

Construction companies

Property developers

Builders

Renovation businesses

Companies and individuals

Crucially, you do not need to be a builder to be a contractor.

If you are a property developer paying trades to build, convert, refurbish, or fit out property, HMRC will usually treat you as a contractor for CIS purposes.

Why property developers are often contractors

This is where many developers are caught out.

If you are:

Developing property for resale

Building new properties

Converting or refurbishing properties

Paying trades directly

Then you are almost certainly a CIS contractor.

It does not matter whether:

You develop through a company or personally

You use one subcontractor or many

The project is large or small

The property is residential or commercial

What matters is that you are paying for construction work as part of a business activity.

Who is a subcontractor under CIS?

A subcontractor is anyone who:

Carries out construction work

For a contractor

Under a contract, written or verbal

Subcontractors can be:

Sole traders

Partnerships

Limited companies

Individuals paid for labour

Most tradespeople working on development projects fall into this category.

What counts as construction work under CIS?

CIS applies to a wide range of activities, much broader than many people expect.

Construction work includes:

Building and demolition

Extensions and structural alterations

Renovations and refurbishments

Electrical and plumbing work

Heating and ventilation

Roofing and brickwork

Painting and decorating

Flooring and tiling

Groundworks and drainage

Site preparation and clearance

It also includes associated labour, even if materials are supplied as part of the job.

Work that is not covered by CIS

Some activities fall outside CIS.

Examples include:

Professional services such as architects and surveyors

Scaffolding hire without labour

Purely material only supplies

Delivery of materials without installation

Security services

Property management services

However, if labour is involved, the position can change quickly, so assumptions are risky.

CIS registration for developers

If you are a property developer acting as a contractor, you must register with HMRC for CIS.

This involves:

Registering as a CIS contractor

Setting up systems to verify subcontractors

Making monthly returns

Deducting and paying CIS tax

Registration should be done before you start paying subcontractors.

Registering late does not remove the obligation, it simply increases the risk of penalties.

Verifying subcontractors

Before paying a subcontractor, you must verify them with HMRC.

Verification tells you:

Whether the subcontractor is registered for CIS

Whether deductions apply

What deduction rate to use

There are three possible outcomes.

CIS deduction rates explained

0 percent, gross payment status

Some subcontractors are approved by HMRC to be paid gross.

This means:

No tax is deducted

The subcontractor receives the full payment

They handle their own tax separately

Gross status is common for established businesses, but must still be verified.

20 percent, standard deduction rate

This is the most common rate.

If a subcontractor is registered for CIS but does not have gross status:

You deduct 20 percent from the labour element

The deduction is paid to HMRC

The subcontractor receives credit for the deduction

30 percent, unregistered subcontractors

If a subcontractor is not registered for CIS:

You must deduct 30 percent

This applies even if they have an accountant

Registration is the subcontractor’s responsibility, not yours

Paying without deduction in this situation creates liability for you as the contractor.

What CIS deductions apply to

CIS deductions are not applied to the full invoice value.

They apply to the labour element only.

From the subcontractor’s invoice, you must exclude:

The cost of materials

VAT charged by the subcontractor

Certain allowable expenses

The remaining labour amount is what the CIS deduction is calculated on.

This means invoices must clearly separate labour and materials.

Monthly CIS returns

As a CIS contractor, you must submit a monthly CIS return to HMRC.

This applies even if:

You made no payments that month

You only paid one subcontractor

The project is small

The return must show:

Who you paid

How much you paid

What deductions were made

Returns are usually due monthly, shortly after the end of the tax month.

Paying CIS deductions to HMRC

The tax you deduct from subcontractors must be paid to HMRC.

This is usually done:

Monthly

Alongside PAYE if you have employees

By a strict deadline

Late payment results in interest and penalties.

CIS and limited company developers

CIS applies equally to limited companies.

If your development company pays subcontractors:

The company is the CIS contractor

The company must register

The company must make deductions

The company must file CIS returns

Being a company does not remove CIS obligations.

CIS and individual developers

CIS also applies to individuals.

If you are developing property personally, not through a company, and you pay subcontractors:

You may still be a CIS contractor

You may need to register

You may need to make deductions

Many individuals wrongly assume CIS only applies to companies.

CIS and property investors vs developers

This is an important distinction.

CIS generally applies where construction work is carried out as part of a business.

If you are:

A landlord carrying out occasional repairs

Paying one off trades for maintenance

You may fall outside CIS.

If you are:

Developing property for resale

Carrying out significant construction

Operating on a commercial basis

CIS is far more likely to apply.

The line can be blurred, and HMRC looks at the facts.

CIS and VAT interaction

CIS and VAT are separate systems, but they interact in practice.

Key points include:

CIS deductions are calculated on labour excluding VAT

VAT is still paid in full to VAT registered subcontractors

CIS does not replace VAT

Reverse charge VAT may apply in some cases

Confusing CIS and VAT is a common source of errors.

CIS and the domestic reverse charge

The domestic reverse charge for VAT in construction has added complexity.

In some cases:

The contractor does not pay VAT to the subcontractor

VAT is accounted for by the contractor instead

CIS deductions still apply to the labour element

This is an area where professional advice is often essential.

What happens if you do not operate CIS correctly

Failing to comply with CIS can be very expensive.

HMRC can:

Demand unpaid CIS deductions

Charge penalties for late or missing returns

Charge interest

Disallow costs

Apply penalties even years later

Importantly, HMRC can pursue you for the tax, even if you already paid the subcontractor in full.

Common CIS mistakes I see with developers

These issues come up repeatedly:

Not registering as a CIS contractor

Paying subcontractors gross without verification

Not separating labour and materials

Missing monthly returns

Assuming small projects are exempt

Confusing employees and subcontractors

Ignoring CIS on refurbishment projects

Most mistakes are due to lack of awareness, not intent.

CIS penalties and enforcement

HMRC takes CIS compliance seriously.

Penalties can apply for:

Late CIS returns

Missing CIS returns

Incorrect information

Failure to make deductions

Penalties increase the longer issues remain unresolved.

How CIS affects developers’ cash flow

CIS affects cash flow in several ways.

For contractors:

You must fund payments net of deductions

You must pay deductions to HMRC

Admin time increases

For subcontractors:

Cash received is reduced

Tax is paid in advance

Refunds may be needed later

Developers need to factor CIS into project cash flow planning.

Record keeping under CIS

Good records are essential.

You should keep:

Subcontractor verification records

Invoices showing labour and materials

CIS deduction calculations

Copies of monthly returns

Proof of payments to HMRC

Records must usually be kept for several years.

CIS and end of project obligations

CIS obligations do not end when a project finishes.

You must:

Continue filing returns until deregistered

Deregister as a CIS contractor when appropriate

Keep records available for HMRC review

Failing to deregister can trigger penalties for missing returns later.

When developers should seek professional help

CIS advice is strongly recommended if:

You are new to development

You pay multiple trades

You operate through a company

You are VAT registered

You use labour only subcontractors

You are unsure whether CIS applies

CIS errors compound quickly.

A simple way to think about CIS for developers

A practical rule of thumb is this:

If you pay people to build or refurbish property as a business, CIS probably applies

If you ignore CIS, HMRC will not

CIS is not optional, and ignorance is not a defence.

Final thoughts on CIS and property developers

The Construction Industry Scheme is one of the most important tax regimes affecting property developers, and one of the easiest to get wrong. Many developers focus on income tax, corporation tax, and VAT, and overlook CIS entirely until HMRC gets in touch.

Handled properly, CIS becomes a routine administrative process. Handled badly, it can result in large unexpected tax bills that wipe out profit on a project.

If you are developing property and paying trades directly, you should assume CIS applies unless you have confirmed otherwise. Registering early, verifying subcontractors, making correct deductions, and filing returns on time will protect you from penalties and give you confidence that your development business is compliant.

As with most property tax issues, the cost of getting CIS advice early is usually far lower than the cost of fixing CIS problems later.