How CIS deductions are calculated, and why materials are excluded

The rate is not a judgement call. It comes from HMRC’s verification response, and you must verify a subcontractor before the first payment unless you have already included them on a return in the current or either of the two previous tax years.

An unverified subcontractor is deducted at 30%, not 20% — whatever they tell you their status is.

Getting this wrong is expensive in one direction only. Deduct 20% from someone HMRC treats as higher rate and HMRC will come to you for the missing 10%, not to the subcontractor. See gross payment status for how the 0% rate is earned and lost.

The deduction applies to the payment less anything that is not payment for labour. In practice you exclude:

• VAT charged by the subcontractor. Always excluded, whether or not the reverse charge applies.
• The direct cost of materials the subcontractor has paid for, including consumable stores and prefabricated materials.
• Plant hired in from a third party, together with the fuel to run it — but not plant the subcontractor owns.
• The CITB levy, where the subcontractor is charged one.
• Manufacturing and prefabrication costs of materials made off site for the contract.

Excluded amounts are still paid in full. They are removed from the calculation, not withheld from the subcontractor.

NoteTravelling expenses and subsistence are not materials. They stay in the deduction base, which surprises people every year.

Direct cost means what the subcontractor actually paid for the materials, not what they have charged you for them. HMRC’s Construction Industry Scheme Reform Manual states the point at CISR15060: the deduction is made from the amount that does not represent the direct cost to the subcontractor of materials used.

So a subcontractor who buys £1,000 of materials and invoices them on at £1,200 has a materials exclusion of £1,000. The £200 mark-up is part of the deduction base. Most subcontractors do not itemise it that way, and most contractors accept the invoiced figure — but if the split is obviously wrong, you are the one who has to challenge it.

As contractor, you must take reasonable steps to satisfy yourself the materials figure is genuine. Accepting an implausible split is your problem, not the subcontractor’s.

Where a subcontractor will not or cannot evidence the materials figure, the safe position is to deduct on the whole payment less VAT and let them recover the overpayment through their own return. Guessing a materials figure to keep the peace is the version that fails an inspection.

A verified subcontractor at 20%

The subcontractor is paid £4,600. The £600 goes to HMRC and is credited against the subcontractor’s own tax bill. Note that the materials and the plant are paid in full — the deduction only ever touched the £3,000 of labour.

The same invoice, subcontractor unverified

The deduction base is still £3,000, but the rate is 30%, so you deduct £900 and pay £4,300. The difference is £300 on one invoice. Over a year of subcontract payments, failing to verify is not a paperwork problem.

What if the exclusions exceed the payment?

They cannot produce a negative deduction. The base floors at zero. If a payment is entirely for materials, the deduction is nil and the payment still goes on your monthly return.

A payment and deduction statement, for every subcontractor you have deducted from, within 14 days of the end of the tax month. A CIS tax month ends on the 5th, so the statement is due by the 19th — the same day as the return.

It has to show:

• Your name and employer’s tax reference
• The end date of the tax month it covers
• The subcontractor’s name, unique taxpayer reference and verification number where they were verified at the higher rate
• The gross amount of the payments, excluding VAT
• The cost of materials that reduced the deduction base
• The amount of tax deducted

NoteSubcontractors with gross payment status do not get a statement, because nothing was deducted. They still go on your monthly return.

Estimark produces the statement as a PDF per subcontractor with the gross, rate, deduction and net for every payment, and a CIS CSV export that shows the deduction base itself so an accountant can check the arithmetic. It records the CIS300 monthly return with both statutory declarations — but it does not transmit the return to HMRC, and it does not email statements out automatically. You download and send them.

You are a mainstream contractor if you pay subcontractors for construction work — that includes a sole trader who occasionally puts work out. You are a deemed contractor if construction is not your business but your spend on construction operations exceeds £3 million in the previous 12 months; that mainly catches large property owners, retailers and housing providers.

CIS does not apply to payments to your own employees, which go through PAYE, and it does not apply to work done for a private householder in their own home when that householder is not a contractor.

NoteWhether someone is a subcontractor or an employee is a status question, not a labelling one. Getting it wrong is a PAYE liability, and the first CIS300 declaration you sign every month is a statement that none of the contracts on the return is a contract of employment.