How the CIS deduction is worked out

Under the Construction Industry Scheme, a contractor does not pay a subcontractor in full. They hold back a slice of the payment and send it to HMRC as an advance towards the subcontractor's tax and National Insurance. Three things decide the figure.

1. It comes off labour, not materials

This is the part most people get wrong. The deduction only ever applies to the labour value of the invoice. The materials you supply are paid in full, along with VAT, plant hire, fuel and consumable stores. That is why the calculator asks for labour and materials separately: put the numbers in the wrong boxes and the deduction comes out too high.

2. Your status sets the rate

If you are registered under CIS and HMRC can verify you, the contractor deducts 20%. If you are not registered, or cannot be verified, they must deduct 30%, so registering is worth doing. If you hold gross payment status, nothing is deducted and you receive the full amount, settling your tax later.

3. VAT sits outside CIS

The deduction is worked out on the labour value before VAT. For most construction work between VAT-registered businesses the domestic reverse charge applies as well, so the customer accounts for the VAT rather than you. Our guide to the VAT reverse charge for construction covers when it applies.

A worked example

Say you invoice a contractor £2,000 of labour and £500 of materials, and you are registered for CIS at 20%.

  • Gross invoice: £2,000 labour plus £500 materials is £2,500.
  • CIS deduction: 20% of the £2,000 labour is £400. Materials are untouched.
  • Net payment now: £2,500 less £400 is £2,100.
  • The £400 is not lost. It is an advance on your tax, and you claim it back when you reconcile with HMRC.

If you were not registered, the rate would be 30%, so the deduction would be £600 and you would receive £1,900. With gross payment status, nothing would be held back and you would receive the full £2,500.

How Sitewise helps

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CIS deductions: common questions

What is a CIS deduction?
Under the Construction Industry Scheme, a contractor deducts money from a subcontractor's payment and passes it to HMRC as an advance towards the subcontractor's tax and National Insurance. It is taken from the labour part of the invoice only, at 20% for registered subcontractors or 30% for those who are not registered. See how CIS works for subcontractors for the full picture.
Is CIS deducted from materials?
No. CIS is deducted from the labour charge only. Materials you supply, along with VAT, plant hire, fuel and consumable stores, are never subject to the deduction, which is why they are entered separately here.
What is the difference between 20% and 30% CIS?
20% is the standard rate for subcontractors registered under CIS and verified with HMRC. 30% is the higher rate applied when you are not registered or cannot be verified. Registering with HMRC moves you from 30% to 20%, so it is worth doing.
How do I claim CIS deductions back?
The deductions are an advance payment of your tax, so you set them against your tax bill. A sole trader claims through Self Assessment, and a limited company sets them against its PAYE and CIS liabilities. Our guide on how to claim your CIS tax refund walks through both.
Does CIS apply to VAT?
No. VAT sits outside CIS. The deduction is worked out on the labour value before VAT, and for most work between VAT-registered businesses the domestic reverse charge means the customer accounts for the VAT instead of you.

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