Construction industry scheme—contract payments
Construction industry scheme—contract payments

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Construction industry scheme—contract payments
  • Definition of a contract payment
  • Payments that are not contract payments
  • Payments that are not contract payments—own build exemption
  • Contract payments—ascertaining the amount that suffers withholding tax under the CIS rules
  • Direct cost of materials
  • Extended meaning of 'materials'

Construction industry scheme—contract payments

The construction industry scheme (CIS) was devised to limit the amount of tax lost as a result of sub-contractors in the construction industry under-declaring or failing to notify their chargeability to UK tax.

The scheme operates by requiring the withholding of tax at source at the point of making a ‘contract payment', thereby reducing the risk of a subsequent default by the sub-contractor. However, if the sub-contractor can prove it has complied with its tax obligations it can register to receive payments gross.

The obligation to deduct tax imposed by the CIS rules applies only to a contract payment. Furthermore, the tax deduction is not applied to the gross amount of the contract payment, but to a smaller sum, net of the direct cost of materials and certain other costs.

This Practice Note:

  1. explains what a contract payment is by referring to the statutory definition and the exemptions from that definition, and

  2. outlines what deductions should be made from a contract payment before the appropriate rate of withholding tax is applied


  1. an overview of how the CIS works, see: Construction industry scheme—overview

  2. the meaning of the terms 'contractor' (including the difference between a mainstream contractor and a deemed contractor), 'sub-contractor' and 'construction operations', see Practice Note: The construction industry scheme—when does it apply?, and

  3. the CIS obligations imposed on contractors, see Practice Note: Construction

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