Most people assume the Construction Industry Scheme (CIS) is only for builders. It is not. If your business has nothing to do with construction but spends heavily on building, fitting out or refurbishing property, HMRC can still pull you into CIS as a "deemed contractor".
The trigger is a single number: £3 million of construction spend in a rolling 12-month period. Cross it, and you take on the same deduction, verification and monthly-filing duties as any building firm, even if you have never picked up a trowel.
This guide explains who the rule catches, exactly how the £3 million threshold is measured, what you have to do once you are in, and how the April 2024 and April 2026 reforms to the scheme affect you.
It is written for landlords, property investors, retailers, manufacturers and other non-construction businesses with big premises budgets. If you want this handled properly, that is the sort of work we do for construction and property clients.
What is a deemed contractor under CIS?
A "deemed contractor" is a business whose trade is not construction, but which spends enough on construction operations to be treated as a contractor anyway.
The rule sits in section 59(1)(l) of the Finance Act 2004. A non-construction business becomes a deemed contractor once its expenditure on construction operations exceeds £3 million in any rolling 12-month period. HMRC's Construction Industry Scheme Reform Manual lists the usual suspects: "large manufacturing concerns, department stores, breweries, banks, oil companies and property investors".
This is different from a "mainstream contractor", which is a business whose actual trade is construction (a builder, developer or labour agency). Mainstream contractors are in CIS from the moment they pay a subcontractor for construction work, with no spending threshold at all.
The deemed contractor route exists so that large organisations cannot side-step the scheme simply because building is not their main line of business. Public bodies are caught by the same £3 million test.
How does the £3 million threshold work?
The threshold is more than £3 million of construction spend in any rolling 12-month period. Two words there do the heavy lifting: "rolling" and "any".
It is not your accounting year. It is a continuous, month-by-month look-back over the previous 12 months. Since 6 April 2021 this has been a true rolling test, which means you cannot escape it by changing your year-end. You have to monitor the running 12-month total, not wait for the books to close.
Once you make your first payment for construction work, you check whether your cumulative spend has gone over £3 million in the 12 months since. Once it does, you must register and operate CIS on the payments you make to subcontractors.
A few points that catch businesses out:
- All construction spend counts towards the test. Even spend on property you use for your own business counts when you are working out whether you have hit the £3 million threshold.
- It is gross construction operations spend, not net of anything. Big fit-outs, refurbishments and civil works add up fast.
- The threshold is per business, and group structures need to look at each entity's own spend.
When can a deemed contractor stop operating CIS?
You are not stuck in the scheme forever. A deemed contractor can stop operating CIS once it can show HMRC that its construction spend in the previous 12-month period has fallen below £3 million, or the contract has ended and it does not expect to make any further payments within the scope of the scheme. Again, because the test is rolling, you have to keep watching the 12-month figure rather than assume one year over the line means permanent registration.
What spending counts towards the threshold?
Construction operations are defined widely. The spend that counts towards your £3 million includes payments for:
- Building work, alterations, repairs, extensions and demolition.
- Site preparation, civil engineering (roads, bridges, and similar) and groundworks.
- Installing heating, lighting, power, water and ventilation systems.
- Painting, decorating and internal cleaning carried out as part of construction works.
Some things are outside CIS and so do not bring you closer to the threshold or attract deductions, including:
- Professional work such as architecture and surveying.
- Scaffolding hire (where no labour is supplied), carpet fitting and delivery of materials.
- Manufacturing or off-site fabrication of materials and components.
- Running canteens, site facilities and similar non-construction services.
There is one important relief once you are a deemed contractor. Under the CIS regulations, a deemed contractor (though not a public body) does not have to apply the scheme to construction work on property used for the purposes of its own business. So a retailer refitting its own stores may be over the threshold, but payments on its own trading premises can fall outside the deduction requirement. The catch is the one noted above: that same own-use spend still counts when you work out whether you have crossed £3 million in the first place.
This split, spend that counts towards the threshold versus spend you actually deduct from, is exactly where deemed contractors trip up. Get it wrong in either direction and you either fail to register when you should, or you over-deduct from suppliers you did not need to.
What must a deemed contractor do once registered?
Once you are in, you carry the full contractor obligations. There is no "lighter touch" version for deemed contractors. In practice that means:
- Register as a CIS contractor with HMRC before you make your next in-scope payment.
- Verify each subcontractor with HMRC so you apply the right deduction rate.
- Deduct tax at source from the labour element of qualifying payments and pay it over to HMRC.
- File a monthly CIS return by the 19th of each month following the tax month, even for months with no payments (a nil return), until you tell HMRC otherwise.
- Give each subcontractor a deduction statement showing what you withheld.
- Keep CIS records to support every return.
The deduction rate depends on the subcontractor's status:
| Subcontractor status | CIS deduction on labour |
|---|---|
| Registered for CIS (standard) | 20% |
| Not registered or not verified (higher) | 30% |
| Holds gross payment status (GPS) | 0% |
Deductions apply to the labour element only, not to the cost of materials, plant hire or VAT.
Late monthly returns carry fixed penalties. You face £100 for one day late, a further £200 once it is two months late, then £300 (or 5% of the deductions, if higher) at six and twelve months, rising again beyond that. The penalties stack per return, so a deemed contractor that registers late and misses several months can run up a meaningful bill quickly.
How do the 2024 and 2026 CIS reforms affect this?
The deemed contractor and £3 million rules themselves have not changed. What has tightened is gross payment status (GPS), which lets a subcontractor be paid with no deduction at all. If your subcontractors hold GPS, these changes matter to your supply chain.
From 6 April 2024, HMRC added VAT compliance to the statutory test a business has to pass to be granted and to keep gross payment status. The same reform expanded HMRC's grounds to immediately cancel GPS to cover cases where a business has fraudulently provided an incorrect return or information relating to VAT, Corporation Tax Self Assessment, Income Tax Self Assessment or PAYE. Minor VAT slip-ups are not meant to count against the test.
From 6 April 2026, the time limit before a business whose GPS was immediately cancelled on those grounds can reapply increases from one year to five years. That is a significant tightening: losing gross status now keeps a subcontractor out of it for far longer.
For you as a deemed contractor, the practical effect is simple. A subcontractor who loses GPS moves from 0% to 20% (or 30% if unverified), so you must re-verify status and adjust deductions promptly. You cannot keep paying gross once HMRC has removed a supplier's gross status.
Illustrative example: a retailer caught by the rule
Illustrative example. Imagine Northgate Retail Ltd, a chain of homeware shops, decides to refurbish several stores. Its trade is retail, not construction, so it has never thought about CIS.
Over a rolling 12-month period it pays building contractors as follows:
| Construction payment | Amount |
|---|---|
| Store A full refit | £1,400,000 |
| Store B refit | £1,100,000 |
| Warehouse mezzanine and fit-out | £750,000 |
| Total construction spend (12 months) | £3,250,000 |
The running total passes £3 million part-way through the warehouse works. At that point Northgate Retail Ltd becomes a deemed contractor under section 59(1)(l). It must register for CIS and operate the scheme on its in-scope subcontractor payments from then on.
Because the shops and warehouse are used for its own business, Northgate may not need to apply deductions to that own-use construction spend under the regulations, but every penny of it still counted towards crossing the £3 million line. So the business is now a registered contractor with monthly filing duties, verification checks and deduction statements to manage, despite never doing a day's construction itself.
These figures are illustrative. Your own position depends on what you spend, what counts as construction operations, and how your premises are used.
Frequently asked questions
Does the £3 million CIS threshold apply to my accounting year?
No. It is a rolling 12-month test, not your accounting period. You measure cumulative construction spend over any continuous 12-month window, so you have to monitor the running total month by month. Since 6 April 2021 you cannot avoid it by changing your year-end date.
Does spend on my own business premises count towards the £3 million?
Yes, for the threshold test. All construction spend, including on property used for the purposes of your own business, counts when working out whether you have crossed £3 million. Once you are a deemed contractor, though, that own-use spend can fall outside the requirement to actually make CIS deductions.
What is the difference between a deemed contractor and a mainstream contractor?
A mainstream contractor's actual trade is construction, and it is in CIS as soon as it pays a subcontractor, with no spending threshold. A deemed contractor is a non-construction business pulled into CIS only because its construction spend exceeds £3 million in a rolling 12-month period.
Can a deemed contractor leave CIS once spending drops?
Yes. You can stop operating CIS once you can satisfy HMRC that your construction spend in the previous 12-month period has fallen below £3 million, or the contract has ended and you do not expect to make further in-scope payments. Because the test is rolling, keep watching the 12-month figure.
What deduction rate do I apply as a deemed contractor?
The same rates as any contractor: 20% from subcontractors registered for CIS, 30% from those not registered or not verified, and 0% from those holding gross payment status. Deductions apply to the labour element only, not materials or VAT.
