Managing Construction Industry Scheme (CIS) Payments With Business Central

If your business operates as a contractor in the UK construction sector, CIS compliance isn't optional, and the admin burden that comes with it is significant. Monthly returns, subcontractor verification, deduction calculations, payment statements, all of it running alongside your regular finance operations.

For businesses running Microsoft Business Central, the good news is that the right setup turns CIS from a manual compliance headache into something that largely runs itself.

What Is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a UK tax framework administered by HMRC. Under it, contractors are required to deduct money from payments made to subcontractors for construction work and pass those deductions directly to HMRC. [1] The deductions count as advance payments toward the subcontractor's tax and National Insurance bill. [1]

It's not a new scheme, CIS has been in place in various forms since 1971, but the compliance obligations are detailed, and the penalties for getting it wrong are real.

Who Does CIS Apply To?

Contractors must register with HMRC before making their first payment to a subcontractor. [1] In this context, a contractor is any business that pays others to carry out construction work.

It also applies to what HMRC calls "deemed contractors", businesses where construction isn't the primary activity, but whose annual construction spend exceeds £3 million within any rolling 12-month period. [1] Property developers, large retailers, and facilities management companies can all fall into this category without considering themselves construction businesses.

Subcontractors should register with CIS even though it's technically optional for them. The reason is straightforward: unregistered subcontractors face a higher deduction rate on their payments, which damages cashflow. [1] Registration is in their interest.

CIS covers most construction activity: site preparation, demolition, building work, alterations, repairs, decorating, and installation of complete systems. [2] It does not apply to architecture and surveying or the delivery of materials. [2]

CIS Deduction Rates Explained

HMRC sets three deduction rates, applied based on the subcontractor's registration and verification status: [1] [5]

An important detail that catches people out: deductions are calculated on the labour element only. [1] Materials, VAT, and certain other costs are excluded from the calculation before the rate is applied.

Gross Payment Status allows a subcontractor to receive payments in full without deductions. HMRC grants GPS to subcontractors who meet specific compliance criteria, including a clean tax record and minimum turnover thresholds. [1] It can also be withdrawn, and from April 2026, the rules around withdrawal have tightened considerably (more on that below).

Your Obligations as a CIS Contractor

If you're registered as a CIS contractor, here's what you're required to do each month.

Verify your subcontractors. Before making any payment to a new subcontractor, you must verify them with HMRC to determine the correct deduction rate. [1] The exception is if you've included that subcontractor on a return within the current or two previous tax years, in which case verification isn't required again. [1] HMRC issues a verification reference number that must be recorded.

File your monthly return. A CIS return must be submitted to HMRC within 14 days of each tax month end, meaning by the 19th of the following month (or the 22nd for electronic payment). [1] The return must detail every payment made to subcontractors during that month, whether paid gross or under deduction. From April 2026, you must also file a nil return in any month where no subcontractor payments were made. [3]

Issue deduction statements. Within 14 days of each tax month end, you must provide each subcontractor you've made deductions from with a written statement showing: your details, their details, the gross payment, the materials cost if applicable, and the amount deducted. [1] These can be issued electronically if both parties agree.

Pay HMRC. The deductions you've collected must be paid to HMRC by the 19th of the following month (22nd electronically). [1] If your average monthly CIS liability is below £1,500, HMRC may allow quarterly payments instead. [1]

What Happens If You Get It Wrong?

The penalties for CIS non-compliance are structured and escalate quickly. For late monthly returns: [1]

• £100 for a return filed even one day late
• £200 if still outstanding after two months
• After six months: the greater of £300 or 5% of the deductions that should have been reported
• After twelve months: the same again on top

Failing to issue deduction statements to subcontractors can result in penalties of up to £3,000. [1] The same applies to failing to produce records when HMRC requests them.

These aren't edge-case amounts. For a busy contractor filing late returns consistently, the penalties accumulate fast.

The April 2026 CIS Changes You Need to Know About

From 6 April 2026, several significant changes to CIS came into effect that every contractor needs to be aware of.

Nil returns are back. HMRC reinstated the requirement for contractors to submit nil returns in months where no subcontractor payments were made. [3] This had previously been removed, and its reinstatement means more administrative work for contractors who have quiet periods.

Gross Payment Status can be cancelled immediately. If HMRC determines that a contractor made or received a payment connected to fraud, and knew, or should have known, about the connection, GPS can be removed with immediate effect. [3] HMRC can also assess the business for the associated tax loss and impose a penalty of up to 30% of that amount. [4]

The GPS reapplication bar extends to five years. Previously, a business that had its GPS withdrawn had to wait one year before reapplying. That period has now increased to five years where withdrawal is connected to fraud or serious non-compliance. [3] For subcontractors who rely on GPS for cashflow, this is a significant risk to manage carefully.

Local authority payments are now exempt. Payments made to local authorities and certain public bodies are no longer subject to CIS deductions, a change that simplifies accounting for contractors working on public sector projects. [4]

Managing CIS in Business Central

Business Central doesn't include CIS compliance functionality in its standard UK build. Handling CIS properly within Business Central requires a dedicated extension, and there are several well-established options available through Microsoft AppSource, including apps from Mercurius IT, Pryme, and Kick ICT.

These extensions integrate directly into Business Central and typically cover the full CIS workflow. Here's what a properly configured Business Central CIS setup handles:

Subcontractor records and deduction rates. Each subcontractor is set up as a vendor in Business Central with their CIS status recorded, gross, standard, or higher rate. [6] When a purchase invoice is raised for that subcontractor, the correct deduction rate is applied automatically based on their verified status.

Automatic deduction calculations. The CIS deduction is calculated on the labour portion of the invoice, with materials and VAT correctly excluded. [6] The deducted amount is posted to the appropriate liability account, ready for payment to HMRC, without any manual calculation required.

HMRC subcontractor verification. The better CIS extensions for Business Central include direct integration with HMRC's online services, allowing you to verify subcontractor status from within Business Central without logging into a separate government portal.

Monthly returns. Business Central generates the monthly CIS return report, covering all payments made to subcontractors during the period, the applicable deductions, and whether each was paid gross or under deduction. [6] The most capable extensions submit this directly to HMRC.

Deduction statements to subcontractors. For each subcontractor you've made deductions from, Business Central can produce the required monthly statement automatically, either printed or issued electronically. [6]

CIS settlement and reconciliation. The amount owed to HMRC is held in a dedicated withholding tax liability account within Business Central. [6] At settlement, the payment is recorded and reconciled against the monthly return, keeping your accounts clean and audit-ready.

Key Things to Get Right in Your Business Central CIS Setup

Getting the configuration right from the start saves a significant amount of rework. A few things worth paying attention to:

Choose the right extension carefully. Not all CIS extensions for Business Central offer the same depth of functionality. In particular, check whether the extension supports direct HMRC integration for verification and return filing, manual workarounds in this area add admin back in through the back door.

Labour versus materials split on invoices. This is where CIS calculations most commonly go wrong. Your purchase invoices need to correctly separate the labour and materials elements, because the deduction is applied only to labour. [1] If your invoices don't make this split cleanly, either you'll over-deduct (which creates disputes with subcontractors) or under-deduct (which creates a liability with HMRC).

Keep verification records up to date. A subcontractor's CIS status can change. If a subcontractor loses their GPS or moves from standard to unverified, the deduction rate applied in Business Central needs to reflect that. Building a regular review of subcontractor status into your month-end process avoids situations where you've been applying the wrong rate.

Understand how CIS interacts with reverse charge VAT. Construction businesses are also subject to the domestic reverse charge for VAT on certain services, which sits alongside CIS as a separate obligation. The two schemes interact, and your Business Central setup needs to handle both correctly, particularly on invoices where reverse charge VAT and CIS deductions apply simultaneously.

Limited company offset. If your business is a limited company receiving CIS deductions as a subcontractor, you can offset those deductions against your PAYE, National Insurance, student loan repayments, and your own CIS liabilities. [1] This reduces the cashflow impact significantly, but it needs to be configured correctly in Business Central so the offset is tracked and applied each month.

Frequently Asked Questions

Does Business Central handle CIS natively?

Business Central's standard UK build doesn't include dedicated CIS functionality. CIS compliance within Business Central is handled through third-party extensions available on Microsoft AppSource, there are several well-regarded options designed specifically for this purpose.

What's the difference between the 20% and 30% CIS deduction rates?

The 20% standard rate applies to subcontractors who are registered with HMRC and have been successfully verified. [1] [5] The 30% higher rate applies when a subcontractor can't be verified, either because they're not registered, or because HMRC can't match their details. It's significantly higher to encourage registration and make it easier for HMRC to collect the correct tax.

Do CIS deductions apply to VAT and materials costs?

No. CIS deductions are calculated on the labour element of the payment only. [1] VAT is excluded from the calculation entirely, and the cost of materials supplied by the subcontractor is deducted from the gross payment before the CIS rate is applied.

What changed with CIS in April 2026?

Three main changes came into effect: nil returns are now mandatory again for months with no subcontractor payments; HMRC can now cancel Gross Payment Status immediately if a business is connected to fraud; and the GPS reapplication bar following withdrawal for fraud has increased from one year to five years. [3] [4] Payments to local authorities are also now exempt from CIS deductions.

Can my subcontractors reclaim CIS deductions?

Yes. CIS deductions made by contractors are advance payments toward the subcontractor's tax bill. [1] Subcontractors reconcile these against their tax liability when they file their self-assessment return (or corporation tax return if a limited company), and receive a refund for any excess deducted during the year.

CIS compliance is one of those areas where small errors compound over time into significant problems, whether that's penalties, incorrect subcontractor payments, or cashflow issues from mismanaged deductions. Getting it set up properly in Business Central from the start is far less painful than unpicking it later. If you'd like to talk through the right CIS setup for your Business Central environment, speak to the Dynamics Connect team and we'll help you get it right.

Sources:

[1] Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340) — GOV.UK

[2] What is the Construction Industry Scheme — GOV.UK

[3] Major CIS reforms coming into effect from April 2026 — Johnston Carmichael

[4] CIS Changes from April 2026: What Subcontractors Need to Know — Finistry

[5] CIS Deduction Rates Explained: 20%, 30%, and Gross Payment — Finistry

[6] Construction Industry Scheme for the United Kingdom — Microsoft Learn