How CIS deductions work

How much tax is deducted under CIS?

Twenty percent of the labour for most subcontractors, thirty percent for those HMRC cannot match, and nothing for those with gross payment status. You find out which applies when you verify the subcontractor with HMRC.

The deduction is one of six jobs a contractor does each month. Our guide to how CIS works covers all six.

Is CIS tax always 20%?

No. It is twenty percent only when the subcontractor is registered for CIS and your verification check matches them. Otherwise it is thirty percent, even if they tell you they are registered.

That is the usual reason a subcontractor sees 30% taken off. GOV.UK warns them: If they cannot verify you, it can affect how much you’re paid. If either do not apply, contractors will take deductions at a higher rate.

If you deduct twenty percent without verifying and HMRC’s record says otherwise, the ten percent difference is yours to make up. So verify every subcontractor before the first payment. How to verify a subcontractor

How do CIS deductions work?

You take VAT and what the subcontractor paid for off the invoice, then apply their rate to what is left. Step by step:

1. Start with the invoice total, without VAT. Where the domestic reverse charge applies there is no VAT on the invoice anyway.
2. Take off what the subcontractor paid for. Materials they bought themselves, plus hired plant, consumables, fuel used on the job (not for travel) and prefabrication. Travel and subsistence stay in.
3. Apply their rate to what is left. That remainder is the labour, and it is the only part CIS applies to.
4. Pay them the invoice total less the deduction. The deduction is yours to pay to HMRC, not to keep.
5. Give them a statement. A payment and deduction statement showing what you paid and what you took off.

GOV.UK tells contractors to start with the total (gross) amount of the subcontractor’s invoice, take off what the subcontractor paid for, then apply the rate: You’ll be left with the net amount you need to pay the subcontractor. And you must give the subcontractor a payment and deduction statement within 14 days of the end of each tax month.

The full list of costs that come off, and the ones people wrongly take off, is in our guide to what counts as materials under CIS.

How much is a CIS deduction? A worked example

On a £1,600 invoice with £400 of materials, a verified subcontractor has £240 deducted and is paid £1,360.

The subcontractor is a groundworker, registered for VAT and verified at 20%. Their CIS invoice is £1,200 of labour and £400 of materials they bought themselves, and the domestic reverse charge applies, so there is no VAT on it.

The deduction is worked out on the labour but comes off the whole invoice. That is why the subcontractor is paid £1,360: the £1,600 total less the £240.

Work out your own invoice

Put in your own figures. The calculator handles the materials, both rates and the reverse charge, and tells you when it cannot be sure. It also has its own page.

Is CIS tax the same as VAT?

No. CIS is tax taken off the subcontractor’s labour; VAT is charged on the work. VAT comes off before the CIS rate is applied, so the deduction is the same whatever happens to the VAT.

In the example, the reverse charge means the subcontractor charges you no VAT. You put the £320 on your own VAT return as VAT due and normally reclaim the same amount, so no money changes hands. If the reverse charge does not apply to the job, they add the £320 to the invoice and you pay it on top: £1,680 in all, with the deduction still £240. When the reverse charge applies

What if the subcontractor has no receipts for materials?

You estimate the cost yourself. GOV.UK says:

“You can ask the subcontractor for evidence (for example, receipts) that they paid for materials directly. If they do not have any evidence, estimate the cost of the materials.”

A lower estimate means a bigger deduction. On the same invoice, if you estimate the materials at £250 instead of £400, the labour becomes £1,350, the deduction £270, and the subcontractor is paid £1,330, which is £30 less. Asking for receipts before you pay avoids the argument.

How do I pay CIS deductions to HMRC?

You list them on your monthly CIS return and pay them over each month. The return is due by the 19th of the month after each tax month ends, and the money by the 22nd if you pay electronically.

CIS monthly returns, deadlines and penalties

How do I stop CIS deductions?

Only with gross payment status from HMRC. The subcontractor applies, and HMRC checks the business, its turnover and its tax record. Until verification shows it, you deduct at their verified rate.

A contractor cannot agree to pay someone gross. If you do it because they said they had the status, the deduction you did not take is yours to pay. How gross payment status works

Do subcontractors get CIS deductions back?

They count towards the subcontractor’s tax, so anything taken over what they owe can be claimed back. GOV.UK says they count as advance payments towards the subcontractor’s tax and National Insurance bill.

Sole traders and limited companies claim in different ways. How to claim a CIS refund