CIS tax on subcontractor invoices: how to calculate deductions
In short
CIS tax is deducted from the labour portion of a subcontractor invoice, not the materials, and never from VAT. Split labour and materials onto separate lines on every invoice so the deduction is right first time.
CIS tax applies to the labour portion of a subcontractor invoice, not the materials. This guide works through a pound sterling example and shows how to split every invoice so deductions are right and month end stays quiet.
A registered subcontractor normally has 20% CIS tax deducted, but only from the labour portion of the invoice, not the whole amount. Take a £5,000 invoice, excluding VAT, made up of £3,200 labour and £1,800 materials. The deduction is 20% of £3,200, which is £640. Deducting 20% of the full £5,000 would take £1,000 and overcharge the subcontractor by £360. Unregistered subcontractors face 30%, so the same labour line would lose £960. This guide shows how to split every invoice so the deduction is right the first time. It covers the UK Construction Industry Scheme (CIS), and the figures below are UK rates.
What the CIS deduction applies to
Under CIS, a contractor deducts tax from payments to subcontractors and pays it to HMRC. HMRC treats those deductions as advance payments towards the subcontractor's tax and National Insurance bill. The standard rates are 20% for registered subcontractors, 30% for unregistered subcontractors and 0% for those with gross payment status.
The legislation applies the percentage to the payment less the direct cost of materials. In practice that means the labour element, plus the subcontractor's profit on it. VAT sits outside the calculation entirely, so always work from the VAT-exclusive figures.
Worked example in pounds sterling
A registered subcontractor invoices a contractor for a bathroom refit. The labour line is £3,200 and the materials line is £1,800, both excluding VAT.
- Invoice total before VAT: £5,000
- Materials, paid in full: £1,800
- Labour subject to CIS: £3,200
- CIS deduction at 20%: £640
- Cash paid to the subcontractor before VAT: £4,360
The contractor reports the £640 to HMRC on the monthly return and pays it over by the 22nd of the following month if paying electronically. The subcontractor receives a payment and deduction statement and offsets the £640 against their own tax bill.
VAT is separate
The CIS deduction is calculated before VAT. Whether VAT is charged normally or under the domestic reverse charge changes the cash that moves, but it never changes the CIS base. Keep the VAT treatment and the CIS split as two separate checks.
Calculate the deduction step by step
Confirm the subcontractor's CIS status
Verify the subcontractor with HMRC before the first payment and record the result. The verification outcome tells you whether to deduct at 20%, 30% or 0%. If HMRC cannot verify them, the 30% rate applies to the labour element, so do not guess from past practice.
Work from the VAT-exclusive invoice
Take the net amounts from the invoice. Ignore the VAT line completely when working out the deduction. If an invoice only shows a VAT-inclusive total, ask the subcontractor to reissue it with net amounts before you pay.
Separate labour from materials on separate lines
Ask for at least two lines: labour and materials. Combined lines such as "supply and fit" force the contractor to estimate the split, and that is where disputes begin. Subcontractors who build the split into their quote and invoice template never have to explain it later.
Check what counts as direct materials
HMRC accepts what the subcontractor can show they paid for building materials and consumables, fuel used on the job (not for travel), and actual plant hire costs. Travel, accommodation, waste removal, insurance and tools or plant the subcontractor owns do not count as materials. They stay in the labour base.
Ask for evidence of the materials cost
The contractor is responsible for checking the materials claim, so ask for copies of supplier invoices or receipts. If a subcontractor does not respond, HMRC guidance allows the contractor to make a reasonable estimate of materials and deduct from the remainder. Document how you reached that estimate.
Apply the rate to labour only
Multiply the labour figure by the rate. In the example, £3,200 x 20% = £640. Show the deduction on the payment record and subtract it from the amount you pay, so the subcontractor sees the same number on the statement.
Record it and file the monthly return
Keep the invoice, the evidence, the rate and the calculation together. File the monthly CIS return and pay HMRC by the 22nd of the month if paying electronically. Issue the payment and deduction statement so the subcontractor can claim the credit.
Why splitting the lines avoids month-end arguments
Overpaying deductions is a cash flow cost for the subcontractor, who must wait until their tax return is processed to get it back. Underpaying is worse for the contractor. HMRC pursues the contractor first for any shortfall, and compliance visits tend to focus on returns with large materials deductions, especially on work that normally has little direct material cost.
Both problems usually come from the same cause: a single lump-sum invoice. When labour and materials arrive on separate lines every time, the contractor can calculate in minutes, the subcontractor can check the maths against their own records, and nobody has to reopen the month.
Owned equipment
Scaffolders and similar trades sometimes claim materials for equipment they own outright. Owned equipment is not hired plant, so it is not a materials deduction. Check these claims before you apply the rate.
Keeping the split consistent across jobs
Consistency matters more than any single calculation. Contractors who receive invoices in different layouts from every subcontractor repeat the checking work each month. Set a standard invoice format with labour, materials and VAT on separate lines, and ask subcontractors to use it. Subcontractors can do the same from the quote stage so the invoice matches what was agreed.
Software helps here. On the subcontractor side, invoices can be built from quote lines so labour and materials stay separate from the first draft. On the contractor side, supplier invoices lets you capture each incoming subcontractor invoice against its purchase order and check the split before approving payment. If you work across the trade, the construction industry page outlines how teams handle quoting, jobs and invoicing in one place.
For a reverse charge VAT angle on the same invoices, see our guide on CIS invoicing and the reverse charge. Always confirm unusual cases with an accountant or HMRC, because status, contract type and the evidence you hold decide the final figure.
Sources
- What you must do as a CIS contractor: Pay deductions to HMRCGOV.UK · accessed 2026-10-26
- Construction Industry Scheme (CIS) - Material differenceTax Adviser (CIOT and ATT) · accessed 2026-10-26
- What you must do as a CIS contractor: OverviewGOV.UK · accessed 2026-10-26
- CIS Materials vs Labour: What You Can DeductZmartly · accessed 2026-10-26