Key facts
- CIS deductions are calculated on the labour element of a payment (total payment minus qualifying materials).
- The formula is: (Total payment − Materials) × Deduction rate = CIS deduction.
- Always calculate the deduction on the amount excluding VAT.
- Issue a payment and deduction statement to the subcontractor showing the full calculation.
- Keep records of the calculation, including how you determined the materials figure.
The CIS Deduction Formula
The basic formula for calculating a CIS deduction is:[1]
CIS deduction = (Total payment − Qualifying materials) × Deduction rate
Where:
- Total payment = the gross amount payable to the subcontractor, excluding VAT
- Qualifying materials = the cost of construction materials purchased by the subcontractor for the work
- Deduction rate = 20% (registered), 30% (unregistered), or 0% (gross payment status)
The net payment to the subcontractor is the total payment minus the CIS deduction (plus VAT if applicable).
Example 1: Labour-Only Payment (20%)
A contractor pays a registered plasterer £2,000 for labour (no materials supplied by the subcontractor):
| Step | Description | Amount |
|---|---|---|
| 1 | Total payment (ex. VAT) | £2,000 |
| 2 | Less: materials | £0 |
| 3 | Labour element | £2,000 |
| 4 | CIS deduction (20%) | −£400 |
| 5 | Net payment to subcontractor | £1,600 |
The contractor pays the plasterer £1,600 and sends £400 to HMRC.
Example 2: Payment Including Materials (20%)
A contractor pays a registered electrician £4,500. The electrician provides an invoice showing £1,500 in materials (cable, switches, consumer units) and £3,000 in labour:
| Step | Description | Amount |
|---|---|---|
| 1 | Total payment (ex. VAT) | £4,500 |
| 2 | Less: qualifying materials | −£1,500 |
| 3 | Labour element | £3,000 |
| 4 | CIS deduction (20%) | −£600 |
| 5 | Net payment to subcontractor | £3,900 |
Without the materials deduction, the CIS deduction would have been £900 (20% of £4,500). Correctly accounting for materials saves the subcontractor £300 in cash flow.
Example 3: Unregistered Subcontractor (30%)
A contractor pays an unregistered bricklayer £3,000 (labour only):
| Step | Description | Amount |
|---|---|---|
| 1 | Total payment (ex. VAT) | £3,000 |
| 2 | Less: materials | £0 |
| 3 | Labour element | £3,000 |
| 4 | CIS deduction (30%) | −£900 |
| 5 | Net payment to subcontractor | £2,100 |
Compare this with the same payment to a registered subcontractor, where the deduction would be £600 (20% rate) and the net payment £2,400. The unregistered bricklayer receives £300 less.
Example 4: VAT-Registered Subcontractor
A VAT-registered, CIS-registered carpenter invoices a contractor for £6,000 plus £1,200 VAT (total invoice: £7,200). Materials are £2,000:
| Step | Description | Amount |
|---|---|---|
| 1 | Invoice total | £7,200 |
| 2 | Exclude VAT (CIS calculated on ex-VAT amount) | £6,000 |
| 3 | Less: qualifying materials | −£2,000 |
| 4 | Labour element | £4,000 |
| 5 | CIS deduction (20%) | −£800 |
| 6 | Net payment: £6,000 − £800 + £1,200 VAT | £6,400 |
The contractor pays the carpenter £6,400 (the net amount plus full VAT) and sends £800 to HMRC as the CIS deduction.
Tip: Always calculate CIS on the VAT-exclusive amount. A common mistake is applying the deduction rate to the VAT-inclusive total, which results in an excessive deduction.
Example 5: Gross Payment Status (0%)
A contractor pays a subcontractor with gross payment status £10,000 for construction work:
| Step | Description | Amount |
|---|---|---|
| 1 | Total payment (ex. VAT) | £10,000 |
| 2 | CIS deduction (0%) | £0 |
| 3 | Net payment to subcontractor | £10,000 |
No deduction is made. The payment must still be reported on the contractor’s monthly CIS return.
Multiple Payments in a Tax Month
If you make multiple payments to the same subcontractor within a single tax month (6th to 5th), calculate the CIS deduction separately on each payment. On the monthly CIS return, report the total of all payments and deductions for each subcontractor for that tax month.[2]
Common Calculation Errors
| Error | Impact | How to Avoid |
|---|---|---|
| Calculating CIS on the VAT-inclusive amount | Excessive deduction; subcontractor underpaid | Always use the ex-VAT figure |
| Not deducting materials before applying the rate | Excessive deduction on the labour element | Ask for itemised invoices; check materials claims |
| Using the wrong deduction rate | Under-deduction (penalty risk) or over-deduction (cash flow harm) | Always verify with HMRC and use the rate they provide |
| Including non-qualifying items as materials | Under-deduction; potential HMRC challenge | Only exclude genuine construction materials purchased by the subcontractor |
Frequently Asked Questions
How do I calculate the CIS deduction?
Take the total payment to the subcontractor (excluding VAT), subtract any qualifying materials costs, and multiply the remaining labour element by the appropriate deduction rate (20% or 30%). The result is the amount to deduct and send to HMRC.
Do I calculate CIS on the VAT-inclusive or VAT-exclusive amount?
Always calculate CIS deductions on the VAT-exclusive amount. VAT is not subject to CIS deductions. If the subcontractor is VAT-registered, you pay the VAT separately in full, and the CIS calculation only applies to the net amount.
What if the subcontractor provides no materials breakdown?
If the subcontractor does not separately identify materials costs on their invoice, you must apply the deduction rate to the entire payment (excluding VAT). It is in the subcontractor’s interest to provide a clear breakdown of labour and materials.
Do I round the CIS deduction up or down?
HMRC does not prescribe specific rounding rules for individual deductions. In practice, most contractors round to the nearest penny. On your monthly CIS return, total deductions can be rounded to the nearest pound.
Further Reading
- CIS Deduction Rates (20%, 30%, 0%) — understanding the three rates
- Materials Deductions Under CIS — what qualifies as materials
- Paying CIS Deductions to HMRC — methods and deadlines for payment
- Monthly CIS Returns (CIS300) — reporting deductions on the monthly return
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