Table of Contents
- What is the Construction Industry Scheme (CIS)?
- CIS Tax Deduction Rates: Complete Breakdown
- How to Calculate CIS Deductions: Step-by-Step
- CIS Invoice Requirements: What You Must Include
- Materials vs Labour: The CIS Split
- CIS and Reverse Charge VAT
- CIS Invoice Examples
- Contractor Responsibilities Under CIS
- How Subcontractors Reclaim CIS Deductions
- Common CIS Mistakes and How to Avoid Them
- CIS Deduction Summary: Key Points
# What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) is a tax deduction scheme that applies to payments made by contractors to subcontractors for construction work in the UK. Under CIS, contractors must deduct tax from subcontractors' payments and pay it directly to HMRC.
**Why CIS exists:** CIS ensures that construction workers and businesses pay the right amount of income tax and National Insurance. It combats tax evasion in the construction industry by collecting tax at source, similar to PAYE for employees.
**Who must operate CIS:** • Contractors (businesses paying for construction work) • Subcontractors (individuals or companies doing the work) • Only applies to construction work in the UK
**This guide covers:** • CIS tax deduction rates and when they apply • How to calculate CIS deductions correctly • Invoice requirements for CIS compliance • Registration process and gross payment status • Common mistakes and how to avoid them • Real invoice examples with calculations
CIS in Simple Terms
Think of CIS as "pay-as-you-earn" for construction workers. Instead of subcontractors paying all their tax at the end of the year, contractors deduct tax from each payment and send it to HMRC on their behalf.
# CIS Tax Deduction Rates: Complete Breakdown
There are three CIS deduction rates depending on the subcontractor's registration status with HMRC.
1. CIS Registered (20%) - Most Common
**Rate:** 20% deduction from gross payment (including VAT)
**Who it applies to:** Subcontractors who are registered with HMRC for CIS. This is the most common rate in the construction industry.
**How to register:** • Apply online at gov.uk/register-for-cis • Provide UTR (Unique Taxpayer Reference) • Business registration details • Bank account information
**Calculation example:** • Net invoice amount: £2,500 • VAT (20%): £500 • Total including VAT: £3,000 • CIS deduction (20%): £600 • **Amount paid to subcontractor: £2,400**
**Benefits of being registered:** • Lower deduction rate (20% vs 30%) • Easier to claim tax refunds • Professional appearance • Compliance with HMRC requirements
2. CIS Not Registered (30%) - Higher Rate
**Rate:** 30% deduction from gross payment (including VAT)
**Who it applies to:** Subcontractors who are NOT registered with HMRC for CIS. This higher rate incentivizes registration.
**Calculation example:** • Net invoice amount: £2,500 • VAT (20%): £500 • Total including VAT: £3,000 • CIS deduction (30%): £900 • **Amount paid to subcontractor: £2,100**
**Why the higher rate:** • Incentive to register for CIS • Covers potential tax liability • Protects HMRC from tax evasion
**Important:** Even at 30% rate, subcontractors can reclaim overpaid tax through Self Assessment returns.
3. Gross Payment Status (0%) - No Deduction
**Rate:** 0% - No CIS deduction applied
**Who it applies to:** Subcontractors who have been granted "gross payment status" by HMRC. This is rare and requires meeting strict criteria.
**Eligibility requirements:** • Been in business for at least 12 months under CIS • Annual turnover of at least £30,000 (£100,000 for companies) • Compliance test passed (tax returns up to date) • Skills test passed (relevant qualifications)
**Benefits:** • Receive full payment without deductions • Better cash flow • Trust from HMRC
**Calculation example:** • Net invoice amount: £2,500 • VAT (20%): £500 • Total including VAT: £3,000 • CIS deduction (0%): £0 • **Amount paid to subcontractor: £3,000**
**Maintaining gross payment status:** • Submit tax returns on time • Pay tax when due • Maintain compliance records • Status reviewed annually by HMRC
| CIS Status | Deduction Rate | Who It Applies To | Amount Received (on £3,000) |
|---|---|---|---|
| Gross Payment | 0% | HMRC-approved subcontractors | £3,000 (100%) |
| CIS Registered | 20% | HMRC CIS registered | £2,400 (80%) |
| Not Registered | 30% | Unregistered subcontractors | £2,100 (70%) |
# How to Calculate CIS Deductions: Step-by-Step
CIS deductions are calculated AFTER VAT is added. This is crucial for correct calculations.
Critical: VAT Before CIS
ALWAYS calculate CIS deduction on the total AFTER adding VAT. A common mistake is calculating CIS on the net amount before VAT, which results in incorrect deductions.
Step 1: Calculate Net Amount
Start with your labour and materials costs: • Labour: £2,000 • Materials: £500 • **Net amount: £2,500**
Step 2: Add VAT (If Applicable)
If you're VAT-registered, add VAT to net amount: • Net amount: £2,500 • VAT (20%): £500 • **Total including VAT: £3,000**
Note: VAT is usually 20% unless reverse charge applies (see Reverse Charge VAT guide).
Step 3: Calculate CIS Deduction
Apply CIS rate to TOTAL including VAT:
**For 20% rate (CIS registered):** • Total including VAT: £3,000 • CIS deduction (20%): £600 • **Amount to receive: £2,400**
**For 30% rate (not registered):** • Total including VAT: £3,000 • CIS deduction (30%): £900 • **Amount to receive: £2,100**
Step 4: Calculate Amount Due
Final amount payable to subcontractor: • Total including VAT: £3,000 • Less CIS deduction: -£600 • **Net payment: £2,400**
The contractor pays £2,400 to the subcontractor and £600 directly to HMRC on their behalf.
# CIS Invoice Requirements: What You Must Include
CIS invoices must include specific information beyond standard invoices.
- **Sequential invoice number** - Unique identifier (e.g., BUILD-2024-001)
- **Invoice date** - Date invoice was issued
- **Your business name and address** - Full registered details
- **Your UTR (Unique Taxpayer Reference)** - 10-digit HMRC tax reference
- **Contractor name and address** - Who is paying you
- **Contractor UTR** - Their Unique Taxpayer Reference
- **Description of work** - What construction work was done
- **Work period covered** - Dates work was performed
- **Net amount for materials** - Cost of materials (if applicable)
- **Net amount for labour** - Cost of labour
- **VAT amount** - Total VAT charged (if VAT-registered)
- **Total amount including VAT** - Gross amount before CIS
- **CIS deduction rate and amount** - State rate (20% or 30%) and £ amount
- **Net amount payable** - Final amount after CIS deduction
# Materials vs Labour: The CIS Split
CIS deductions apply to labour costs, but the treatment of materials is complex.
**Key rule:** CIS deductions apply to the TOTAL payment including materials, unless specific exemptions apply.
**Common scenarios:**
Best Practice: Separate Materials
For large projects, ask contractors to pay merchants directly for materials. This means CIS deductions only apply to your labour, improving your cash flow.
Scenario 1: Materials Supplied by Contractor
If the contractor provides materials, you only invoice for labour: • Your invoice: Labour only • CIS applied: To labour amount + VAT • Materials: Not on your invoice
Scenario 2: Materials Supplied by Subcontractor (Most Common)
If you supply materials as part of the job: • Your invoice: Labour + materials • CIS applied: To TOTAL (labour + materials + VAT) • No materials exemption for small amounts
**Example:** • Labour: £2,000 • Materials: £500 • Net total: £2,500 • VAT (20%): £500 • Total inc VAT: £3,000 • CIS (20%): £600 (applied to full £3,000) • Amount paid: £2,400
Scenario 3: Large Materials Purchases (Exemption)
Materials CAN be excluded from CIS if: • You buy materials directly from merchant • Merchant invoices contractor directly • Materials are delivered to site • Materials are clearly identifiable as separate
**How to handle:** • Materials: Separate invoice from merchant to contractor • Labour: Your invoice with CIS deduction • Benefit: CIS only on labour, not materials
# CIS and Reverse Charge VAT
Construction services under CIS are also subject to the domestic reverse charge for VAT (introduced March 2021).
**How they work together:** 1. **Subcontractor issues invoice:** No VAT charged (reverse charge) 2. **Contractor accounts for VAT:** Pays VAT to HMRC directly 3. **CIS deduction calculated:** On the amount that WOULD have included VAT
**Example calculation with reverse charge:** • Net amount: £2,500 • VAT: £0 (reverse charge - contractor accounts for £500) • Notional total inc VAT: £3,000 • CIS deduction (20%): £600 (calculated on £3,000) • **Amount paid to subcontractor: £1,900**
**Invoice wording:** "Reverse charge VAT applies. Customer must account for £500 VAT to HMRC. CIS deduction of £600 (20%) calculated on notional total of £3,000 including VAT."
Complex Interaction
Reverse charge and CIS together can be confusing. The key is that CIS is calculated on what the total WOULD have been with VAT, even though no VAT is actually charged on the invoice.
# CIS Invoice Examples
See real-world CIS invoice examples with detailed calculations.
Example 1: CIS Registered (20%) - Standard Invoice
**Builder Subcontractors Ltd** 45 Construction Way, Leeds, LS1 1AA UTR: 1234567890
**Invoice To:** Main Contractor Ltd 89 Site Road, Leeds, LS2 2BB UTR: 0987654321
Invoice Number: BUILD-2024-0089 Invoice Date: 20/10/2024 Work Period: 13/10/2024 - 18/10/2024
**Description of Work:** Brickwork for single-storey extension
| Item | Quantity | Rate | Amount | |------|----------|------|--------| | Labour - Bricklaying | 40 hours | £40.00 | £1,600.00 | | Labour - Labourer | 20 hours | £20.00 | £400.00 | | Materials - Bricks | 1,000 | £0.50 | £500.00 |
**Net Amount:** £2,500.00 **VAT (20%):** £500.00 **Total Including VAT:** £3,000.00
**CIS Deduction (20%):** £600.00 **Amount Payable to Subcontractor:** £2,400.00
Note: Contractor will pay £2,400.00 to subcontractor and £600.00 to HMRC on their behalf.
Example 2: CIS Not Registered (30%)
**Joe Builder (Sole Trader)** 12 Trade Street, Manchester, M1 1AA UTR: 5555666677
**Invoice To:** Construction Co Ltd UTR: 888899990
Invoice Number: JB-2024-045 Invoice Date: 20/10/2024
**Description:** Plastering works - living room and hallway
| Item | Amount | |------|--------| | Labour | £800.00 | | Materials (plaster, beads) | £150.00 |
**Net Amount:** £950.00 **VAT (20%):** £190.00 **Total Including VAT:** £1,140.00
**CIS Deduction (30% - Not CIS Registered):** £342.00 **Amount Payable:** £798.00
Note: As I am not CIS registered, a 30% deduction applies. I can reclaim any overpaid tax through my Self Assessment return.
Example 3: Gross Payment Status (0%)
**Premier Construction Services Ltd** 78 Builder's Row, Birmingham, B1 1AA UTR: 7777888899 **Gross Payment Status Verified**
**Invoice To:** Development Co Ltd UTR: 111122223
Invoice Number: PCS-2024-0234 Invoice Date: 20/10/2024
**Construction Work:** Full electrical rewire - 3-bed house
| Item | Amount | |------|--------| | Labour and testing | £3,500.00 | | Materials | £1,200.00 |
**Net Amount:** £4,700.00 **VAT (20%):** £940.00 **Total Amount Payable:** £5,640.00
**CIS Deduction:** £0.00 (Gross Payment Status)
**Full Payment Due:** £5,640.00
Note: This company has HMRC-verified gross payment status. No CIS deduction applies.
Example 4: CIS with Reverse Charge VAT
**Advanced Builders Ltd** 34 Construction Ave, London, EC1A 1BB VAT No: GB 123 4567 89 UTR: 9999888877
**Invoice To:** Main Contractors PLC VAT No: GB 987 6543 21 UTR: 777766665
Invoice Number: AB-2024-0167 Invoice Date: 20/10/2024
**Construction Work:** Groundwork and foundations
| Item | Amount | |------|--------| | Labour | £6,000.00 | | Materials | £2,000.00 |
**Net Amount:** £8,000.00 **VAT:** £0.00 (REVERSE CHARGE APPLIES - See note below) **Notional Total (inc VAT):** £9,600.00
**CIS Deduction (20%):** £1,920.00 **Amount Payable to Subcontractor:** £6,080.00
**REVERSE CHARGE NOTICE:** This invoice is subject to the domestic reverse charge for construction services. Customer must account for £1,600.00 VAT directly to HMRC. CIS deduction of £1,920.00 (20%) is calculated on the notional total of £9,600.00 (including VAT)}
# Contractor Responsibilities Under CIS
If you're a contractor (paying subcontractors), you have specific duties under CIS.
Penalties for Non-Compliance
Contractors face penalties for: Not verifying subcontractors (£3,000+ per failure), Late CIS returns (£100-£400), Late CIS payments (interest and penalties), Incorrect deductions (HMRC assessment and penalties).
- 1**Verify subcontractors with HMRC** - Check their CIS status before first payment
- 2**Deduct correct tax rate** - Apply 20%, 30%, or 0% based on verification
- 3**Pay deducted tax to HMRC** - Submit monthly CIS returns and pay deductions
- 4**Provide payment statements** - Give subcontractors detailed deduction statements
- 5**Keep accurate records** - Maintain records of all CIS verifications and payments
- 6**File monthly CIS returns** - Submit returns to HMRC by 19th of following month
- 7**Issue annual statements** - Provide subcontractors with year-end tax summaries
# How Subcontractors Reclaim CIS Deductions
CIS deductions are advance payments of your income tax. You can reclaim overpayments through Self Assessment.
**Step 1: Track Your Deductions** Keep all: • CIS payment and deduction statements from contractors • Monthly CIS statements • Year-end CIS tax summaries
**Step 2: File Self Assessment Tax Return** Report all: • Total payments received • Total CIS deductions made • Other income and expenses • Allowances and reliefs
**Step 3: HMRC Calculates Your Tax Bill** They'll work out: • Your actual tax liability for the year • Total CIS already paid • Any refund due or additional tax owed
**Step 4: Receive Refund (If Applicable)** • If CIS deductions exceed actual tax: HMRC refunds you • If more tax owed: You pay the difference • Usually processed within 4-6 weeks
**Example:** • Total payments received: £30,000 • CIS deductions paid (20%): £6,000 • Actual income tax due: £4,000 • **Refund due: £2,000**
Maximize Your Refund
Claim all allowable business expenses (tools, van, fuel, insurance, training) to reduce your tax bill and increase your CIS refund. Keep detailed records of all expenses.
# Common CIS Mistakes and How to Avoid Them
Learn from common errors in CIS invoicing and compliance.
1. Calculating CIS on Net Amount (Before VAT)
**Mistake:** CIS deduction = £2,500 × 20% = £500 (wrong!) **Correct:** CIS deduction = £3,000 (inc VAT) × 20% = £600 **Impact:** Undercharging contractor, losing £100 **Solution:** ALWAYS add VAT first, then calculate CIS
2. Not Including UTR Numbers
**Mistake:** Missing your UTR or contractor's UTR on invoice **Impact:** Non-compliant invoice, rejected by contractor's accounts **Solution:** Always include both UTRs on every CIS invoice
3. Confusing Materials Exemption Rules
**Mistake:** Assuming materials are always CIS-exempt **Impact:** Dispute with contractor over deductions **Solution:** CIS applies to total unless materials are separately invoiced by merchant
4. Not Verifying CIS Status with HMRC
**Mistake (Contractors):** Assuming subcontractor is registered without checking **Impact:** Wrong deduction rate applied, HMRC penalties **Solution:** ALWAYS verify with HMRC before first payment using CIS verification service
5. Missing Monthly CIS Deadlines
**Mistake (Contractors):** Late submission of monthly CIS returns **Impact:** £100-£400 penalties per late return **Solution:** Set up calendar reminders for 19th of each month deadline
# CIS Deduction Summary: Key Points
Understanding CIS is crucial for construction industry compliance. Here are the essential takeaways:
- 1CIS has three rates: 0% (gross payment), 20% (registered), 30% (not registered)
- 2ALWAYS calculate CIS on the total AFTER adding VAT
- 3Include both your UTR and contractor UTR on every invoice
- 4CIS deductions are advance payments of income tax - you can reclaim overpayments
- 5Materials are usually included in CIS calculation unless separately invoiced
- 6Reverse charge VAT and CIS can apply together (complex but manageable)
- 7Contractors must verify subcontractors with HMRC before paying
- 8Keep detailed records of all CIS statements and deductions
- 9File Self Assessment to reclaim any overpaid CIS deductions
- 10Gross payment status requires meeting strict HMRC criteria
⚠️ Critical: See the #1 CIS Mistake (Costs You Money!)
The most expensive CIS error is calculating deductions BEFORE VAT instead of AFTER. Our detailed examples show you exactly how to avoid this £100+ mistake per invoice.
- Step-by-step CIS deduction calculations with visual examples
- Side-by-side comparison of correct vs incorrect invoices
- Advanced example showing CIS with Reverse Charge VAT
- Learn why UTR numbers are mandatory and how to format them correctly
CIS Invoice: Correct vs Incorrect Example
See how to properly calculate and display CIS deductions on construction invoices.
| Description | Qty | Rate | Amount |
|---|---|---|---|
| Brickwork - Single Storey Extension | 1 | £2000.00 | £2000.00 |
| Materials (Bricks and Cement) | 1 | £500.00 | £500.00 |
| Description | Qty | Rate | Amount |
|---|---|---|---|
| Building Work | 1 | £2500.00 | £2500.00 |
Key Differences Explained
Both subcontractor and contractor UTR numbers displayed
UTR numbers missing from invoice
CIS invoices MUST include both parties' UTR numbers. This is a mandatory HMRC requirement for CIS compliance. Without UTRs, the invoice is not valid for CIS purposes and HMRC may reject deduction claims.
CIS deduction calculated AFTER VAT is added (20% of £3,000 = £600)
CIS deduction calculated on net amount before VAT (20% of £2,500 = £500)
This is the most common CIS mistake! CIS deductions must be calculated on the TOTAL including VAT, not the net amount. In this example, the correct deduction is £600 (20% of £3,000), not £500 (20% of £2,500). Getting this wrong means underpaying tax.
Specific description: "Brickwork - Single Storey Extension" with materials itemized
Vague description: "Building Work"
CIS invoices must clearly describe the construction work performed. HMRC requires detailed descriptions to verify the work qualifies for CIS. Separating labour and materials also helps with accurate record-keeping.
Clear notice explaining CIS deduction calculation and payment to HMRC
No explanation of CIS deduction
Best practice is to include a CIS notice explaining the deduction calculation method. This helps the contractor understand their obligations and prevents disputes. It should state the calculation basis (total inc. VAT) and confirm the contractor will remit to HMRC.
£3,000 (total inc VAT) - £600 (CIS 20%) = £2,400 amount due
£3,000 (total inc VAT) - £500 (incorrect CIS) = £2,500 amount due
The "Amount Due" must be calculated as: Total (inc VAT) minus CIS deduction. Using the incorrect CIS calculation results in the subcontractor receiving more than they should, causing tax shortfalls that must be corrected later.
Frequently Asked Questions
What is the CIS deduction rate in the UK?
CIS deduction rates are: 20% for CIS-registered subcontractors (most common), 30% for unregistered subcontractors, and 0% for those with gross payment status.
Is CIS deduction calculated before or after VAT?
CIS deduction is calculated AFTER VAT is added. You must add 20% VAT to the net amount first, then apply the CIS deduction rate to the total including VAT.
Can I reclaim CIS deductions?
Yes. CIS deductions are advance payments of your income tax. If the total CIS deducted exceeds your actual tax liability, you can reclaim the overpayment through your Self Assessment tax return.
Do I need to be CIS registered?
While not legally required, CIS registration is highly recommended for subcontractors. It reduces your deduction rate from 30% to 20%, saving you significant money and improving cash flow.
What is gross payment status?
Gross payment status allows subcontractors to receive payments without CIS deductions. It requires meeting strict HMRC criteria including 12+ months trading, £30k+ turnover, and passing compliance tests.
Does CIS apply to materials?
Usually yes. CIS deductions apply to the total payment including materials, unless the materials are supplied separately by a merchant who invoices the contractor directly.
What happens if I do not register for CIS?
If you are not CIS registered, contractors must deduct 30% from your payments instead of 20%. This significantly reduces your take-home pay, though you can reclaim overpayments via Self Assessment.
How do CIS and reverse charge VAT work together?
When both apply, the invoice shows no VAT (reverse charge), but CIS deduction is calculated on the amount that would have included VAT. The contractor accounts for VAT separately to HMRC.