CIS deductions explained
The Construction Industry Scheme, usually just called CIS, is the arrangement where a contractor takes money off a subcontractor's payment and sends it to HMRC on the subcontractor's behalf. It is not an extra tax. It is an advance payment towards the subcontractor's Income Tax and National Insurance.
It causes endless confusion on invoices, almost always for the same two reasons: people apply the wrong rate, or they apply the deduction to the whole invoice instead of just the labour.
Who deducts, and who gets deducted from
The contractor — the business paying for the construction work — makes the deduction. The subcontractor doing the work receives the reduced amount. If you are invoicing a main contractor for your labour, you are the subcontractor and the deduction comes off your invoice.
A homeowner paying you directly is not a contractor for CIS purposes. Domestic work for a private customer has no CIS deduction at all.
The three rates
| Rate | Applies when | What it means for you |
|---|---|---|
| 20% | You are registered with HMRC under CIS | The standard rate. One fifth of your labour charge is withheld and paid to HMRC against your tax bill. |
| 30% | You are not registered, or HMRC cannot verify you | The penalty rate. Registering is quick and moves you to 20%, so being on 30% is almost always worth fixing. |
| 0% | You hold gross payment status | Nothing is withheld and you are paid in full. You must meet HMRC's turnover and compliance tests to qualify. |
The deduction comes off labour only
This is the part that most commonly goes wrong, and it costs subcontractors real money when it does.
The CIS deduction applies to the labour element of your invoice. It does not apply to:
- Materials you supplied
- Plant hire
- Fuel, other than for travelling
- Equipment hired for the job
- VAT
If your invoice is £2,000 of labour plus £1,000 of materials, the 20% deduction is £400, not £600. Getting this wrong hands £200 to HMRC that should have been in your account this month.
Because of this, your invoice has to separate labour from materials clearly. If it does not, a cautious contractor may apply the deduction to the whole amount, and unpicking it afterwards is far more work than splitting the lines in the first place.
A worked example
You are a registered subcontractor invoicing a main contractor. The job was £2,000 labour and £1,000 materials, and you are not VAT registered.
- Labour: £2,000
- Materials: £1,000
- Invoice total before deduction: £3,000
- CIS deduction at 20% on labour only: £400
- Net amount the contractor pays you: £2,600
The £400 goes to HMRC and is credited against your tax bill. You are not out of pocket in the long run, but you are out of pocket this month, which is why cash-flow planning matters on CIS work.
What about VAT?
VAT is calculated separately and is never part of the CIS deduction. On top of that, if both you and your customer are VAT registered and the work falls under CIS, the VAT domestic reverse charge usually applies, which means the customer accounts for the VAT instead of you charging it.
Getting your deduction statements
The contractor must give you a payment and deduction statement, normally monthly, showing what was deducted. Keep them. They are how you prove to HMRC what has already been paid on your behalf when you file your return.
This guide is general information about how CIS works, not tax advice for your business. If your situation is complicated, talk to an accountant.
Work out your CIS deduction
Enter the labour and materials on your invoice to see the deduction and what you will actually be paid.
Materials, plant hire and fuel are excluded from the deduction. VAT is calculated separately and is never subject to CIS. The deduction is credited against your Income Tax and National Insurance.
CIS questions
Is CIS deducted from materials?
No. The CIS deduction applies to the labour element of the invoice only. Materials, plant hire, equipment hire and fuel are all excluded from the calculation.
What is the CIS deduction rate?
20% if you are registered with HMRC under the Construction Industry Scheme, 30% if you are unregistered or cannot be verified, and 0% if you hold gross payment status.
Is CIS an extra tax?
No. It is an advance payment towards your Income Tax and National Insurance. The amount deducted is credited against your tax bill when you file.
Does CIS apply to work for a homeowner?
No. A private homeowner paying for work on their own home is not a contractor for CIS purposes, so no deduction is made.
Is VAT included in the CIS deduction?
No. VAT is calculated separately and is never subject to the CIS deduction.
How do I move from 30% to 20%?
Register as a subcontractor with HMRC under the Construction Industry Scheme. Once you are registered and the contractor can verify you, the rate drops to 20%.
Let Quill do the CIS arithmetic
Set your rate once, split labour from materials as you write the invoice, and the net figure comes out right every time.