The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry and certain other businesses.

Under the scheme, all payments made from a contractor to a subcontractor must take account of the subcontractor’s tax status as determined by HM Revenue & Customs (HMRC). This may require the contractor to make a deduction, which they then pay to HMRC, from that part of the payment that does not represent the cost of materials incurred by the subcontractor.

The deduction rates for the scheme are 20% for subcontractors registered with HMRC for payment under deduction and 30% for those not registered. Subcontractors who meet certain conditions imposed by HMRC are able to receive payments without deduction of tax.

There are severe implications for non-compliance with the CIS, including strict financial penalties and, in some circumstances, prosecution.