CIS and retention for subcontractors, explained

General guidance only. Check the standard itself and take advice from your own competent person for the job in front of you. Last reviewed 22 October 2026.

What CIS is

Under the Construction Industry Scheme, a contractor who pays you for construction work usually deducts money from your payment and passes it to HMRC. The deduction counts as an advance payment towards your tax and National Insurance, so you do not lose it: you account for it later. HMRC says CIS covers most construction work to buildings, including refurbishment, so it can apply to fire, security and electrical subcontractors. Whether a particular job counts, such as a service visit or a repair, is worth checking in HMRC's CIS guidance rather than assuming.

The three rates

Register for CIS before you start work for a contractor and give them the exact details you registered with, including your Unique Taxpayer Reference. If they cannot verify you, the higher rate applies.

What the deduction is taken from

The deduction is not a percentage of the whole invoice. The contractor starts with the invoice total and takes off what you have paid for yourself, including VAT, materials you bought directly, consumable stores, plant hire and fuel (other than for travel). The rate is applied to what is left, which is mostly your labour. This matters because it is the main reason a CIS deduction on a job with a lot of materials is much smaller than the headline rate suggests.

A worked example

These are illustrative figures. A fire alarm installation invoice is £10,000 before VAT. £6,000 of it is labour and £4,000 is materials. VAT at 20% is £2,000, so the invoice total is £12,000. The contractor deducts CIS at 20% of the labour, which is £1,200. VAT is not part of the deduction. The customer pays you £12,000 less £1,200, which is £10,800.

Now suppose the contract holds back 5% retention. Retention is a percentage of the invoice before VAT, so £500 is held. The labour share is still 60%, so CIS is taken on 60% of the £9,500 paid now, which is £5,700, and at 20% that is £1,140. Before VAT, you would receive £9,500 less £1,140, which is £8,360 now. How VAT on a retained sum is treated is a question for your accountant. When the retention is released later, CIS is taken on the labour share of that release in the same way.

Retention is not CIS

Retention is a contract term: the customer holds back a percentage of what they owe you until the defects period or the end of the job. It is agreed between you and your customer. HMRC does not set it, and it does not change the CIS rate. Check the percentage, the release date and the conditions before you start, and write the amounts held on every invoice so you can see what is outstanding.

Statements and returns

• The contractor must give you a payment and deduction statement within 14 days of the end of each tax month. The tax month runs from the 6th to the 5th. Keep every statement, because HMRC may ask for evidence of the deductions.
• The contractor files a monthly return by the 19th following the end of the tax month.
• If you are a sole trader, the deductions go on your Self Assessment return and HMRC sets them against your tax bill. If you run a limited company, you set the deductions against your PAYE liability through your Employer Payment Summary.
• If the deductions come to more than you owe, HMRC repays the difference. A limited company can reclaim unused CIS deductions after the end of the tax year.

Gross payment status

Gross payment status means contractors pay you without deducting tax. To qualify, your business has to have paid its tax and National Insurance on time, carry out construction work in the UK, run through a bank account and meet a turnover test on construction work, excluding VAT and materials. For a sole trader that is £30,000 over the last 12 months. Partnerships and companies have their own thresholds. Check the current thresholds with HMRC before you apply.

How Compliar helps

Compliar lets you set a CIS rate (20% standard, 30% higher or 0% for gross payment status) on a customer, and a retention percentage on a customer or project, and applies them to the invoice. Mark each line as labour or materials, and CIS is worked out on the labour share only. VAT is never subject to CIS.

• CIS and retention lines shown under the invoice totals, with the amount due now worked out for you.
• A running retention total per customer and project, so you can see what is held and when it falls due for release.
• Deposits and numbered progress claims on a project, with the deposit and retention shown on each claim.
• Invoices sent from Compliar to Xero, with payments coming back into Compliar.

CIS and retention are on Office seats and above. Compliar records the deductions on your invoices; your payment and deduction statements, tax returns and any claims stay with you and your accountant.