CIS Deductions on Invoices, Explained Without the Jargon
What CIS is deducted from, what it isn't, how the 20% and 30% rates are decided, and worked examples showing the difference between doing it right and doing it wrong.
What CIS actually is
The Construction Industry Scheme is a system where the contractor withholds tax from what they pay a subcontractor and sends it to HMRC on that subcontractor's behalf. It's a payment on account against your eventual tax bill, not an extra tax.
If you invoice a main contractor for construction work, this applies to you. If you invoice a homeowner directly, it doesn't.
The one rule that matters most
CIS is deducted from the labour element only, before VAT.
Read that again, because almost every expensive mistake comes from getting one half of it wrong.
Not from materials. Not from plant hire. Not from the VAT-inclusive total. From the labour, excluding VAT.
A worked example
You invoice a contractor for a second-fix job:
| Line | Amount | | --- | --- | | Labour | £800.00 | | Materials | £400.00 | | Gross total | £1,200.00 |
You're a registered subcontractor, so the rate is 20%.
Correct: 20% of the £800 labour = £160 deducted. The contractor pays you £1,040.
Wrong: 20% of the £1,200 total = £240 deducted. The contractor pays you £960.
That single error costs you £80 on one invoice. Do it weekly for a year and you've handed over four thousand pounds you'll be waiting until your Self Assessment to reclaim.
Which rate applies
There are three, and you don't choose: the contractor verifies your status with HMRC:
• 20% — you're registered with HMRC under CIS and the contractor verified you successfully. This is the normal case.
• 30%: you couldn't be verified, usually because you never registered. This is the incentive to register, and it's a big one.
• 0% (gross payment status) — you've qualified to be paid gross and settle the tax yourself. You need to pass HMRC's business, turnover and compliance tests.
Setting the right rate on your invoice doesn't change what the contractor deducts. It just means the figure they pay matches the figure you were expecting, which saves a phone call.
What counts as materials
Materials you actually paid for and are passing on at cost. That includes the consumer unit, the cable, the accessories, and plant you hired for the job.
What it does not include is a markup dressed up as materials. HMRC expects the materials figure to be the direct cost to you. Inflating it to shrink your labour figure and reduce the deduction is exactly the kind of thing a compliance check looks for.
If you're not sure how to split a line, split it honestly and keep the supplier invoice.
CIS and the VAT reverse charge together
Since March 2021, most construction services between VAT-registered businesses fall under the domestic reverse charge. You charge no VAT, and your customer accounts for it on their own return.
The two interact cleanly once you see it: CIS is calculated on the labour element before VAT, and under the reverse charge there's no VAT on the invoice anyway. So the deduction is calculated on the labour element as shown.
The same £1,200 invoice under the reverse charge:
| Line | Amount | | --- | --- | | Labour | £800.00 | | Materials | £400.00 | | Subtotal | £1,200.00 | | VAT (reverse charge) | £0.00 | | Total | £1,200.00 | | Less CIS at 20% on labour | −£160.00 | | Amount payable | £1,040.00 |
Your invoice must also carry a note stating the customer accounts for the VAT. We've covered when that applies in the VAT domestic reverse charge for construction.
What your invoice needs to show
A CIS invoice has to make the split obvious. At minimum:
• Labour on its own line or lines
• Materials on their own line or lines
• The gross total
• The CIS deduction shown separately, with the rate
• The net amount actually payable
Anything less and the contractor's accounts team has to reverse-engineer your split. They will either ring you, or pay you what they think is right, and neither is a good outcome.
Keep the statements
Every month, the contractor must give you a CIS payment and deduction statement showing what they paid and what they withheld. Keep every one.
Those statements are your evidence of tax already paid when you file your Self Assessment. Without them you're arguing with HMRC from memory. Sole traders reclaim through their tax return; limited companies offset the deductions against PAYE liabilities.
Common mistakes, ranked by cost
• Deducting from the gross total instead of labour only. The most expensive, and the most common.
• Deducting after VAT rather than before. Adds roughly 20% to the amount withheld.
• Not registering, and being deducted at 30% instead of 20%.
• Not splitting labour and materials, leaving the contractor to guess.
• Losing the monthly statements, then struggling to reclaim.
Getting the maths done for you
Our free CIS invoice generator does this calculation properly: mark each line as labour or materials, choose your rate, and the deduction comes off the labour element before VAT. It shows the total and the amount payable, and downloads as a PDF. No signup.
This article is general guidance, not tax advice. CIS status and rates depend on your registration and verification with HMRC. Check with your accountant if you're unsure.
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