Construction Industry Scheme, UK


United Kingdom
Construction and woodworking
Target Groups: 


The Construction Industry Scheme was launched as a regulatory measure in 2005 to improve tax compliance within the construction sector. Feedback from the sector suggests that the measure has been effective in ensuring compliance. However, the measure does not address other aspects of undeclared work in the construction sector such as false declarations of self-employed status.



HMRC is an arm of the UK public authorities that concerns itself with the collection of tax revenues from businesses and employees. This measure builds upon other initiatives to address the prevalence of undeclared work in the UK and its cost to the economy. For example, HMRC has developed numerous campaigns targeted at the reducing the hidden economy over the last few years. These include a range of incentives for businesses to formalise their activities as well as to inform and influence public opinion on the issue of undeclared work. These have attempted to change public attitudes and to reduce the incidence of undeclared work in the UK.

The construction sector has been identified consistently as having high levels of undeclared work; for example, in the analyses of the sector by Mateman and Renooy (2001) and Williams and Renooy (2008). The Construction Industry Scheme (CIS) is a measure implemented by HMRC the covers payments made by contractors to subcontractors in the construction industry to ensure that the correct levels of tax and National Insurance Contributions are paid.


  • The primary aim is to improve the level of tax compliance in the construction industry through regulation.
  • CIS also seeks reduce the administrative burden between contractors and subcontractors for paying the correct levels of tax by introducing pre-filled forms and online tax returns for firms and traders in the construction industry.

Specific measures

The current form of CIS is a development of a system of registration cards for firms in the sector introduced in 1999 designed to ensure compliance in paying taxes by declaring work undertaken. Regulatory support for the scheme was introduced under The Income Tax (Construction Industry Scheme) Regulations 2005 which stipulate that subcontractors within the construction industry must be registered with HMRC and that contractors must also verify that subcontractors are registered under the scheme.

CIS states that subcontractors must be registered with HMRC and sets the rules for payments for construction work. This means that both parties in the contractor-subcontractor relationship should be known entities to the tax authorities and that they undertake full declaration of work undertaken. Parties registered under CIS are obliged to submit monthly returns online to HMRC. This is designed to bring all businesses operating in the construction sector into the formal economy through enforcing compliance with taxation laws.

Actors involved

  • HMRC;
  • Contractors and subcontractors in the construction industry;
  • Organisations from outside the construction industry that spend more than GBP 1 million annually on construction activities are classed as contractors. They therefore fall under the remit of the measure and must also register under CIS.

Outcome of evaluations: lessons and conclusions

Achievement of objectives

In 2010, HMRC commissioned an evaluation of CIS. This showed that respondents believe that CIS is achieving its objectives in terms of compliance and reducing administrative burdens on firms:

  • 81% agreed that CIS is effective in ensuring that construction businesses pay income tax.
  • 79% of respondents agree that CIS gives them confidence that construction businesses are complying with their tax obligations.
  • 65% agreed that the updated version of CIS (2007) is simpler to administer than the old scheme and 57% agree that the updated scheme takes less time per month to complete than previously.

Obstacles and problems

The CIS measure does not safeguard against false declarations of self-employment. This is a further facet of undeclared work as the self-employed pay lower National Insurance Contributions and are taxed on profits, rather than income. This leads to unfair competitive advantage for traders who operate under false declarations of self-employment and means that workers sacrifice some of their employment rights. In 2009 a government consultation (PDF 458Kb) estimated that the cost in lost revenue from false declarations of self-employment in construction as being GBP 350 million.

There is speculation that CIS reduces trust between the construction sector and the state. The evaluation of CIS showed that 51% of those within the scheme believe that its very existence signals distrust of the construction industry by HMRC.

Lessons learned

The CIS measure does not guarantee full tax compliance across the whole industry: for example, false declarations of self-employment status is still possible. The scheme was included under changes made to the Finance Act (2008) to enhance HMRC’s power to cross-reference taxation records, making it more possible to identify instances of undeclared revenues. From 1 April 2009 HMRC has received enhanced powers to check that tax has been correctly calculated, declared and claimed across income tax, capital gains tax, corporation tax, the Construction Industry Scheme, VAT and PAYE. This provides an added deterrence to undeclared work and is designed to complement CIS by increasing detection rates of tax avoiders.

Impact indicators

• The construction sector employs around 2.14 million workers, around 3.4% of employment, in the UK.

• The number of VAT/PAYE registered businesses in the construction industry in 2011 was 262,465 firms (Office for National Statistics, 2011). However, the sector has a high proportion of self-employed workers and small enterprises that may not be recorded under this measure of businesses and so the number of firms in the sector is likely to be higher than this figure. Additionally, because CIS includes certain firms outside of the construction sector under its definition of ‘contractor’, the total number of firms impacted by CIS is likely to be higher again.

• In 2010 HMRC recorded 1,028,863 registered firms or traders as part of CIS. Table 1 shows that the majority of firms are small subcontractors (turnover < GBP 100,000 per annum):

Table 1 Breakdown of registrants under CIS measure

Registrant type

Number registered under CIS

Contractor – large 5,060
Contractor – medium 8,859
Contractor – small 43,535
Subcontractor – large 3,409
Subcontractor – medium 15,887
Subcontractor – small 836,652
Dual – large 25,182
Dual – medium 35,818
Dual – small 54,461
Total 1,028,863

Notes: Size is by annual turnover – small (< GBP 100,000), medium (GBP 100,000 to 499,999) and large (>499,000).

Source: Ipsos MORI, Evaluating the Construction Industry Scheme, HMRC research report 106, October 2010


In theory, this kind of approach could be extended to other sectors of the UK economy to enforce formal reporting of work undertaken. However, its transferability to other Member States is contingent on the nature of incumbent legislation and taxation systems and whether these are also susceptible to undeclared work in the construction industry.




CIS as a measure for tackling undeclared work operates at a business to business level and has made some progress towards formalisation in the construction sector. However, the current focus of the coalition government appears to be on the behaviour of individuals, as opposed to sectors or firms. In a recent interview, Treasury Minister David Gaulke described (undeclared) cash-in-hand payments to tradesmen to avoid tax as 'morally wrong' and it has been reported that in the near future HMRC will be launching an amnesty aimed at encouraging cash-in-hand tradesmen to formalise their work by declaring taxes they owe. This suggests that CIS may soon be accompanied by measures targeted more specifically at individual traders.


Euromonitor International, online database:

HMRC, Construction Industry Scheme:

HMRC, Measuring tax gaps 2011.

HM Treasury (2009), False self-employment in construction: taxation of workers.

Ipsos MORI (2010), Evaluating the Construction Industry Scheme, HMRC research report 106, October.

Mateman, S. and Renooy, P. (2001), Undeclared labour in Europe: Towards an integrated approach of combating undeclared labour, Amsterdam, Regioplan.

Office for National Statistics, UK Business: Activity, Size and Location 2011.

Pedersen, S. (2003), The Shadow Economy in Germany, Great Britain and Scandinavia: A measurement based on questionnaire surveys, Statistics Denmark.

Schneider F, (2002), Size and measurement of the informal economy of 110 countries around the world, presented at a Workshop of Australian National Tax Centre, ANU, Canberra, Australia, 17 July.

Eurofound (2008), Williams, C. and Renooy, P., Measures to tackle undeclared work in the European Union, Publications Office of the European Union, Luxembourg.

Alex Wilson, IRRU, University of Warwick


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