Deemed contractors and the £3m CIS rule

What is a deemed contractor?

A business whose main work is not construction, but which spends enough on it to be brought into CIS anyway. Most contractors are the other kind. GOV.UK: If your business is construction and you pay subcontractors for construction work, you’re a ‘mainstream’ contractor.

A deemed contractor is decided by what it spends, not by its trade. HMRC’s CIS340 guide gives examples, each with the same condition attached. The following bodies or businesses are examples of those that are ‘deemed’ to be contractors if they spend more than £3 million in the previous 12 month period on construction operations:

• non-construction businesses such as large manufacturing concerns, departmental stores, breweries, banks, oil companies and property investment companies
• local authorities
• the Housing Corporation, housing associations, housing trusts, Scottish Homes and the Northern Ireland Housing Executive
• public bodies and government agencies or Departments of the Crown (including any Officer of the House of Commons and the Scottish Parliamentary Body)

Source: HMRC, CIS340 section 2.2. These are examples only. Any business outside construction can be caught by the spend.

How does the £3 million test work?

You add up what you spent on construction work over the last 12 months, at any point in time, not just once. HMRC’s manual sets out what goes in:

• The line is £3 million. You are a deemed contractor when in the period of one year ending with that time, the person's expenditure on construction operations exceeds £3 million.
• It is a rolling 12 months. The business adds up its spend at any time on a rolling basis, day to day or month to month, over the 12 months before.
• VAT comes out. the term ‘expenditure’ means expenditure excluding VAT.
• So do materials. The figure does not include the cost of materials or non-construction expenditure included in a construction contract.
• Work on your own premises still counts. It may be exempt from CIS (see below), but it goes in the total. This applies even if some payments are not within the scheme because they are for construction operations on property used for the purpose of the business.

Source: HMRC manual CISR12055 and CIS340 section 2.5.

GOV.UK’s own summary is shorter and easy to misread. It says you count if you have spent more than £3 million on construction in the 12 months since you made your first payment. That sounds like one check from a fixed start. The manual is clear that the 12 months roll forward, so you keep checking for as long as you spend on building work.

How do I work out if we have gone over £3 million?

Count each payment without VAT or materials, then total the last 12 months every month. Take a contract priced at £550,000 plus VAT, of which £150,000 is materials. It counts as £400,000.

Now say a business makes these payments, each counted the same way:

• March 2026: £1,000,000
• June 2026: £800,000
• September 2026: £600,000
• December 2026: £500,000
• May 2027: £1,200,000

1. The first year is under. From March 2026 to February 2027 it spends £2,900,000. Read as “12 months since your first payment”, that looks like the end of it.
2. The rolling total goes over. In May 2027 it pays £1,200,000. The 12 months from June 2026 to May 2027 now add up to £3,100,000, more than £3 million. It is a deemed contractor from that payment.
3. Then it drops back under. With no more building work, the June 2026 payment falls out of the 12 months in June 2027. The total is now £2,300,000, so it can ask HMRC to stop treating it as a contractor, if it does not expect to go over again.

The figures are ours, for illustration. Your own total comes from your books, so keep construction spend, VAT and materials separate from the start.

When does deemed contractor status start?

On the day the total goes over, not when you notice. HMRC’s manual says deemed contractor status applies to a business as soon as the necessary conditions apply. That is why GOV.UK says You must monitor your construction spend if you are likely to become a deemed contractor.

If you can see the total heading for the line, register before you reach it. Registering as a contractor within the CIS is advised as early as possible in order to comply with CIS obligations.

What does a deemed contractor have to do?

The same as any other CIS contractor, once it pays for work inside the scheme:

1. Register as a contractor. To register as a contractor, you need to follow the process for setting up as a new employer. How to register
2. Verify each subcontractor before paying them. Before you can pay a new subcontractor, you’ll need to ‘verify’ them. HMRC then gives you the rate, usually 20% of the labour, or 30% if it cannot match them.
3. Take the deduction off and give a statement. GOV.UK: you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.
4. Send a CIS return every month. Send your monthly returns to HMRC by the 19th of every month following the last tax month.
5. Pay HMRC what you deducted. Pay HMRC every month by the 22nd (or the 19th if you’re paying by post).

Source: GOV.UK, what you must do as a CIS contractor. The full monthly routine is in how CIS works.

Does CIS apply to work on our own premises?

Not for a business. CIS340 says businesses brought in by their spending do not need to apply the scheme to expenditure that relates to property used for the purposes of the business itself. That can include:

• offices
• warehouses
• nursing homes
• any other facilities used for the business

Public bodies cannot use it. This exemption applies only to businesses and not to public bodies, local authorities or mainstream contractors. And CIS still applies to work on property that is:

• not used for the purposes of the business, such as where it’s let for commercial purposes to a third party
• for sale or to let (except where the sale or letting of that property is purely incidental to the business)
• held as an investment

Source: HMRC, CIS340 section 2.5.

If every payment you make is exempt, you do not have to register at all. However, if all payments on construction operations are not within the scheme then there is no obligation for the deemed contractor to register as a contractor and file returns.

Does a deemed contractor need to file nil returns?

Not by law, but you still have to tell HMRC, or you get a penalty. HMRC’s CIS340 guide says: Deemed contractors who have not paid any subcontractors in a particular month are not legally required to file a nil return. However, if they do not inform HMRC of this by either filing a nil return or by telling us they will be inactive in the period, then we will issue a penalty.

If a penalty does arrive, telling HMRC that nobody was paid ends it. Where this happens and the deemed contractor subsequently tells us that no subcontractors were paid in the month we’ll cancel the penalty. The easier route is a nil return, or marking the scheme inactive for the months you expect to pay nobody. The 2026 change that made nil returns compulsory again is worded for ordinary contractors only: From 6 April 2026 the obligation to file a nil return will be reinstated for mainstream contractors. Nil returns and inactivity

How do I stop being a deemed contractor?

Wait until your spend for the last 12 months is back under £3 million, then tell HMRC. The manual says you stay a contractor until expenditure on construction operations falls below the £3million threshold in the previous rolling 12 month period, and to de-register the business does not expect to reach the threshold again in the foreseeable future.

1. Check the last 12 months. Total your construction spend the same way as above: no VAT, no materials.
2. Check the year ahead. If you expect to go back over, stay registered.
3. Ring the CIS helpline. If you wish to de-register from the CIS you will need to contact the CIS Helpline: CIS helpline.

Source: HMRC manual CISR12070 and CISR12060.

It should not be a fight. HMRC tells its own staff that the claim should be accepted with a minimum of checking. For a short gap in building work, HMRC would rather you paused than left. If construction work should decrease or cease for short periods of time HMRC recommends that businesses do not de-register from CIS but use the facility to have a temporary period of inactivity applied.

Other questions about deemed contractors