How CIS deductions work

What is the CIS deduction?

The Construction Industry Scheme (CIS) is HMRC's way of collecting tax from subcontractors in UK construction at source. Under it, a contractor deducts a set percentage from a subcontractor'spayment and pays that amount directly to HMRC. It counts as an advance towards the subcontractor's Income Tax and National Insurance — not an extra tax, just tax collected earlier.

So the flow is always one direction: the contractor (the business paying for the work) withholds the deduction, and the subcontractor (the business doing the work) receives the net amount. If you receive an invoice and pay a subcontractor, you are the contractor for that payment and the deduction is your responsibility.

The three CIS deduction rates: 20%, 30% and 0%

Which rate you apply depends entirely on the subcontractor's status with HMRC. You confirm this by verifying the subcontractor before you pay them — HMRC tells you the correct rate.

• 20% — registered and verified. The standard rate for a subcontractor who is registered for CIS and successfully verified with HMRC.
• 30% — unverified or unregistered. The higher rate applies when a subcontractor is not registered for CIS, or cannot be verified. Verifying them often moves the rate to 20%.
• 0% — gross payment status. Some subcontractors qualify for gross payment status, meaning no deduction is taken at all. They pay their own tax through Self Assessment or Corporation Tax instead. You still report the payment.

The core rule: deduct on labour, not materials

This is the part that causes the most errors. The CIS deduction applies to the labour element of the invoice only. The following are always excluded from the calculation:

• Materials — the cost of materials the subcontractor supplied.
• VAT — VAT is never part of the amount you deduct from.
• Qualifying plant and equipment — plant hire and certain consumable costs are exempt.

In practice this means you split each invoice into labour and the exempt costs, apply the rate to the labour figure, and pay the materials and other exempt amounts across to the subcontractor in full. Getting the split wrong is the single most common CIS mistake — over-deducting on materials short-changes the subcontractor, and under-deducting leaves you exposed to HMRC.

A worked example

Say a verified subcontractor (20% rate) sends an invoice for £2,400 labour plus £560 materials:

• Deduction = 20% of the labour only = 20% × £2,400 = £480.
• Materials of £560 are paid in full — no deduction.
• The subcontractor receives £2,400 − £480 + £560 = £2,480.
• £480 goes to HMRC and is reported on your monthly CIS300 return.

If that same subcontractor were unverified, the rate would be 30% and the deduction £720; if they held gross status, the deduction would be £0 and they'd receive the full £2,960.

Want this worked out for your own figures? Use the free CIS deduction calculator — enter labour, materials and the rate, and it returns the deduction, the net pay, and the CIS300 figures.

Reporting it: the CIS300 monthly return

Every contractor must send HMRC a CIS300 monthly return declaring the subcontractors paid that tax month, the amounts, and the deductions made. The tax month runs from the 6th to the 5th, and the return is due by the 19th of the month. You must file even in a month where you made no payments (a nil return).

Miss the deadline and the penalties stack up:

• £100 — as soon as the return is 1 day late.
• £200 — when it reaches 2 months late.
• Further penalties apply at 6 and 12 months, so a forgotten return gets expensive fast.

On top of the return, you pay the deductions you withheld over to HMRC, and you give each subcontractor a payment and deduction statement showing what you took off — they need it to reclaim the deduction against their own tax bill.

Stop doing this by hand

Splitting labour from materials, looking up the right rate, and re-keying every subcontractor invoice into your accounting software each month is slow, and it's exactly where the costly errors creep in. That's the problem we're building CISflow to remove.

CISflow reads a subcontractor invoice and extracts the CIS fields for you — UTR, verification number, the labour/materials split, the deduction rate and net pay — then drops a clean, HMRC-ready CIS bill straight into Xero for you to review and approve. You stay in control of every figure; you just stop typing them.

CISflow is live and in early access. Start free if you'd like to try it, or use the free calculator today.

This guide is general information on UK CIS, not tax advice. Always verify a subcontractor's status and rate with HMRC. CISflow is a data-entry tool, not an accountancy or tax service — you remain responsible for figures submitted to HMRC.