Why is the CIS deduction only on labour and not materials?

The CIS deduction is an advance towards the subcontractor's Income Tax and National Insurance, which relate to their profit on the work — their labour. Materials they bought to do the job are a cost they're being reimbursed for, not income to be taxed, so HMRC excludes them. VAT and qualifying plant or equipment hire are excluded for the same reason. You apply the rate to the labour figure only and pay the materials across in full.

What counts as 'materials' for the CIS split?

Materials are the direct cost of physical materials the subcontractor bought to carry out the work — timber, cable, fixings, plasterboard, paint and so on — plus consumable stores and, separately, the cost of qualifying plant or equipment hire and fuel. Materials must be the actual cost to the subcontractor; a subcontractor cannot inflate the materials figure to reduce the deduction. The subcontractor's own labour, travel and general overheads are not materials.

What do I do if the invoice doesn't split labour and materials?

You can't guess. If a subcontractor's invoice shows only a single total with no materials breakdown, HMRC's position is that the whole amount is treated as labour and the deduction applies to all of it. Before deducting on the full amount, ask the subcontractor for a corrected invoice or a written breakdown of the genuine materials cost. Keep that evidence — you need to be able to justify any materials you exclude.

Is VAT included when I work out the CIS deduction?

No. VAT is never part of the figure you deduct from. You strip out VAT, strip out the genuine materials and qualifying plant, and apply the CIS rate (20%, 30% or 0%) to the remaining labour amount only. With the VAT domestic reverse charge in construction, VAT often won't appear on the invoice at all, but the principle is the same: the deduction is on labour, before VAT.

How-to · UK CIS

How to split labour and materials on a CIS invoice

The CIS deduction applies to labour only— materials are exempt. Getting that split right is the single most common place CIS goes wrong. Here's the complete practitioner answer: why it works that way, how to read the split off an invoice, what to do when it isn't itemised, and worked examples.

Why materials are exempt from the deduction

Under the Construction Industry Scheme, a contractor withholds a percentage of a subcontractor's payment and pays it to HMRC as an advance towards that subcontractor's Income Tax and National Insurance. Those taxes relate to the subcontractor's income from the work — in other words, their labour.

Materials are different. When a subcontractor buys timber, cable or plasterboard to do the job, they're being reimbursed a cost, not paid income to be taxed. Taxing that money would be taxing a cost twice. So HMRC excludes the genuine materials cost from the CIS deduction. The same logic excludes VAT and qualifying plant and equipment hire. The deduction lands only on the labour element — the part that's genuinely the subcontractor's earnings.

What counts as materials (and what doesn't)

The split only works if you know which side of the line each figure sits. As a practical guide:

Treated as materials (deduction-exempt)

The actual cost of physical materials the subcontractor bought for the job — timber, fixings, cable, paint, plasterboard, aggregates.
Consumable stores genuinely used up on the job.
The cost of qualifying plant or equipment hire, and the fuel to run it, where the subcontractor hired it from a third party.
VAT — always stripped out before you calculate.

Treated as labour (the deduction applies)

The subcontractor's own labour charge for doing the work.
Travel, subsistence and general overheads — these are not materials.
Profit or mark-up on the job.
Any materials figure the subcontractor can't substantiate as a genuine cost.

The key rule: materials must be the real cost to the subcontractor. A subcontractor can't inflate the materials line to shrink the deduction, and as the contractor you need to be able to justify any materials you exclude if HMRC asks.

How to read the split off the invoice

On a well-prepared subcontractor invoice the split is already there — you just have to read it correctly. Work through it in order:

Find the totals. Identify the gross before VAT, the VAT (if shown) and the net.
Strip out VAT. VAT is never deducted from — set it aside straight away.
Pull out genuine materials. Total the line items that are real material costs and qualifying plant hire.
What's left is labour. Gross (ex-VAT) minus materials and qualifying plant = the labour figure.
Apply the rate to labour only. Multiply the labour figure by the subcontractor's CIS rate — 20%, 30% or 0%.

For how the rate itself is decided, see the CIS deduction rates guide; for the wider picture of who deducts and how it's reported, the complete CIS deductions guide covers it.

A worked example

A verified subcontractor (20% rate) sends an invoice with £3,000 labour and £800 materials, plus VAT:

Strip out the VAT — it's not part of the deduction.
Materials of £800 are exempt and paid in full.
Deduction = 20% of the labour only = 20% × £3,000 = £600.
The subcontractor receives £3,000 − £600 + £800 = £3,200 (plus any VAT due).
£600 goes to HMRC and is reported on your monthly CIS300.

If that subcontractor were unverified, the rate would be 30% (a £900 deduction); if they held gross payment status, the deduction would be £0. Notice the materials figure never changes the deduction — only the labour and the rate do.

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, no sign-up needed.

What to do when the invoice doesn't split it

This is where it gets risky. If a subcontractor's invoice shows only a single lump sum with no materials breakdown, you cannot simply estimate the materials and deduct on the rest. HMRC's position is clear:

With no materials breakdown, the whole payment is treated as labour and the deduction applies to all of it.
Before deducting on the full amount, ask for a corrected invoice or a written breakdown of the genuine materials cost.
Only exclude materials you can substantiate — keep the breakdown or receipts as evidence.
Never accept a materials figure that looks inflated; you, the contractor, carry the exposure if the split is wrong.

Under-deducting (excluding materials that aren't really there) leaves you exposed to HMRC; over-deducting (treating real materials as labour) short-changes the subcontractor. When in doubt, get the breakdown in writing.

Stop doing the split by hand

Reading every subbie invoice, separating labour from materials, stripping VAT and applying the right rate — for one or two invoices a month it's manageable. For a contractor or a busy bookkeeper with a stack of them before the 19th, it's slow, repetitive and exactly where costly errors creep in.

CISflow reads a subcontractor invoice and extracts the labour/materials split, the deduction rate and the net pay for you — 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 separating them by hand. CISflow reads this split automatically — try it free.

Keep reading

This guide is general information on UK CIS, not tax advice. The labour/materials rules can have edge cases — always check HMRC's CIS guidance or your accountant for your specific situation, and 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.

FAQ

Labour vs materials — common questions

Why is the CIS deduction only on labour and not materials?: The CIS deduction is an advance towards the subcontractor's Income Tax and National Insurance, which relate to their profit on the work — their labour. Materials they bought to do the job are a cost they're being reimbursed for, not income to be taxed, so HMRC excludes them. VAT and qualifying plant or equipment hire are excluded for the same reason. You apply the rate to the labour figure only and pay the materials across in full.
What counts as 'materials' for the CIS split?: Materials are the direct cost of physical materials the subcontractor bought to carry out the work — timber, cable, fixings, plasterboard, paint and so on — plus consumable stores and, separately, the cost of qualifying plant or equipment hire and fuel. Materials must be the actual cost to the subcontractor; a subcontractor cannot inflate the materials figure to reduce the deduction. The subcontractor's own labour, travel and general overheads are not materials.
What do I do if the invoice doesn't split labour and materials?: You can't guess. If a subcontractor's invoice shows only a single total with no materials breakdown, HMRC's position is that the whole amount is treated as labour and the deduction applies to all of it. Before deducting on the full amount, ask the subcontractor for a corrected invoice or a written breakdown of the genuine materials cost. Keep that evidence — you need to be able to justify any materials you exclude.
Is VAT included when I work out the CIS deduction?: No. VAT is never part of the figure you deduct from. You strip out VAT, strip out the genuine materials and qualifying plant, and apply the CIS rate (20%, 30% or 0%) to the remaining labour amount only. With the VAT domestic reverse charge in construction, VAT often won't appear on the invoice at all, but the principle is the same: the deduction is on labour, before VAT.