Unravelling CIS and MTD for contractors and subcontractors

If you’re a self-employed contractor or subcontractor in the construction industry, you should already be aware of HMRC’s Construction Industry Scheme (CIS) and the specific tax rules and reporting requirements that apply to you.

The introduction of Making Tax Digital (MTD) for Income Tax at the £50,000 qualifying income threshold from April 2026 is an extra complication to navigate. The threshold reduces to £30,000 from April 2027 and to £20,000 from April 2028.

Construction Industry Scheme

CIS aims to ensure that tax is collected in advance from payments made to subcontractors working in the construction industry. Contractors generally deduct tax from payments to subcontractors and pay those deductions directly to HMRC. The deductions count as advance payments towards the subcontractor’s tax and National Insurance liabilities.

What are you?

You’re a contractor if you pay subcontractors to work on construction projects for you.

You’re a subcontractor if you’re paid to do construction work for a contractor.

You can be both a contractor and a subcontractor, depending on the work you do and who you are paying.

Registering for CIS

Contractors who meet the CIS requirements have to register. If you’re a subcontractor, you should register for CIS if you work for a contractor as a sole trader, partner or through a limited company. If you do not register, the contractor will normally have to deduct tax at the higher rate of 30%.

Under CIS, contractors deduct tax from payments to subcontractors and pay it directly to HMRC as an advance payment towards the subcontractor’s tax and National Insurance liabilities.

At the end of the tax year, subcontractors remain responsible for reporting their income and working out their final tax and National Insurance position. For sole traders and partners, CIS deductions are taken into account through Self Assessment.

This is known as payment under deduction, sometimes referred to as Net Payment Status (NPS).

The deduction rates are:

• 20% for subcontractors who are registered for CIS and are paid under deduction.
• 30% where the subcontractor is not registered for CIS, cannot be verified by the contractor, or there is another reason HMRC requires the higher rate.
• 0% for subcontractors who have been granted Gross Payment Status (GPS).

The CIS percentage is not simply based on the total amount shown on an invoice. Certain amounts can be excluded before the deduction is calculated, including VAT and qualifying costs for materials, plant hire and certain other items.

Gross Payment Status (GPS)

You can apply for Gross Payment Status (GPS), which means contractors can pay you in full without making CIS deductions. You will then be responsible for paying your own tax and National Insurance liabilities.
Your business must pass three tests to qualify for GPS:

1. The Compliance Test: You must have complied with relevant tax and CIS obligations, including paying tax and National Insurance on time. VAT compliance is also relevant to the test.
2. The Business Test: You must be carrying out construction work, or providing labour for construction work, in the UK, and your business must be run through a bank account.
3. The Turnover Test: Your net construction turnover for the relevant 12-month period, excluding VAT and the cost of materials, must meet the following minimum thresholds:
Sole traders: at least £30,000.
Partnerships: at least £30,000 per partner, or £100,000 for the whole partnership.
Limited companies: at least £30,000 per director, or £100,000 for the whole company. There are additional rules where a company is controlled by five people or fewer.

Contractor verification of GPS status

You don’t normally need to notify individual contractors that you have GPS, as most use HMRC’s verification process to establish how you should be paid under CIS.

Maintaining GPS status

GPS can be cancelled where a business fails to meet the relevant compliance requirements and tax obligations. From 6 April 2026, HMRC also has stronger powers to immediately remove GPS in cases involving serious CIS non-compliance or fraud. Where GPS is immediately removed under these new rules, the business can be prevented from reapplying for GPS for five years.

Making Tax Digital (MTD)

Making Tax Digital (MTD) for Income Tax has brought a new landscape for small business financial reporting. It applies to unincorporated businesses and landlords according to qualifying income, rather than whether they are contractors, subcontractors or another type of business. It does not replace CIS reporting requirements.

If you’re a sole trader or property landlord with qualifying income above £50,000 for 2024/25, you must use MTD for Income Tax from 6 April 2026, unless an exemption applies. This includes self-employed contractors and subcontractors who meet the qualifying-income threshold.

If you have qualifying income above £30,000 for 2025/26, MTD applies to you from 6 April 2027.

Qualifying income is based on gross income from self-employment and property before expenses. For a CIS subcontractor, the CIS tax deduction does not reduce gross income in determining whether the MTD threshold is exceeded.

How do CIS and MTD work together?

MTD for Income Tax does not replace CIS reporting requirements. However, contractors and subcontractors have different obligations.

1. If you’re a CIS contractor

If you hire subcontractors under CIS, you continue to file a CIS monthly return. MTD does not replace this.

You must:

• Verify subcontractors where required.
• Keep records of payments and deductions.
• Submit a CIS return every month covering payments made during the previous CIS tax month.
• File the return by the 19th of the following month.
• From 6 April 2026, if you have not paid any subcontractors, you must either submit a nil CIS return or notify HMRC of a period of inactivity. An inactivity request can cover up to six months.

You can use commercial software that handles both CIS and MTD.

2. If you’re a CIS subcontractor

This is different.

You do not submit a separate CIS monthly return yourself. Your contractor reports the payment and CIS deduction to HMRC.

If you are a sole trader and required to use MTD for Income Tax, you must keep your business records digitally and report your income and expenses through MTD.

HMRC specifically says that CIS deductions should be included in your MTD quarterly updates. The deductions will also be taken into account when your tax position is finalised.

Crucially, a CIS deduction is not a business expense. It is tax that has already been deducted from your payment and paid to HMRC on your behalf.

You should also keep the payment and deduction statements supplied by your contractors. These show the payments made to you and the CIS deductions taken from them and are important for checking your records and tax position. Contractors must generally provide these statements within 14 days of the end of the relevant CIS tax month.

Exceptions

Limited Companies: MTD for Income Tax does not apply to a subcontracting business operated through a limited company that pays Corporation Tax. However, the company may still be subject to CIS. Where CIS deductions are made from payments to a limited company, the company generally claims those deductions through its PAYE payroll system rather than through its Corporation Tax return.

VAT-registered businesses: MTD for VAT is a separate requirement from MTD for Income Tax. VAT-registered businesses may already have obligations to keep digital VAT records and submit VAT returns through MTD-compatible software. VAT registration and MTD for Income Tax are separate issues, so being VAT registered does not by itself determine whether MTD for Income Tax applies.

MTD software

MTD requires you to keep digital records of your business income and expenses and submit quarterly updates to HMRC using compatible software.

Your quarterly updates are summaries of your digital records, not four separate tax returns. You will still need to complete the relevant year-end tax process and pay any tax due.

Some software packages include features for both CIS and MTD. Ask your accountant or financial adviser about the available options, or check that any software you use is compatible with HMRC’s MTD requirements.

Example: CIS income and the MTD threshold

For example, suppose a CIS subcontractor has £60,000 of gross business income during the tax year.

Their contractor deducts £12,000 in CIS tax deductions, leaving £48,000 actually paid to the subcontractor.

The subcontractor also has £20,000 of allowable business expenses.

For tax purposes, CIS deductions and business expenses are dealt with separately when calculating the subcontractor’s final tax position. However, when calculating whether the subcontractor exceeds the MTD qualifying-income threshold, the relevant figure is the £60,000 gross income, before CIS deductions and before business expenses.

This means that the subcontractor is above the £50,000 qualifying-income threshold and is therefore within MTD for Income Tax from 6 April 2026, assuming no exemption applies.

The important point is that CIS deductions are not a reduction in turnover. They are tax payments made to HMRC on the subcontractor’s behalf.

We’re here to help!

CIS payments can be complex, even more so under MTD. HMRC has published a comprehensive guide, and Rackhams Accountants has a dedicated team to answer any questions or queries.

Please contact us on 01482 631700 or use our website contact form, and we will respond to you within 24 hrs.

https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340

Https://www.rackhamsaccountants.co.uk/contact-the-team

• All information is correct at the time of publication