Calculate CIS deductions

As a CIS contractor, you must calculate and deduct tax from payments to subcontractors for construction work. The deduction is paid to HMRC on behalf of the subcontractor, who can offset it against their own tax liability.

Getting the calculation right is essential. Deducting too little means you may have to pay the difference yourself. Deducting too much creates problems for your subcontractors and your working relationships.

When you must make deductions

You must make CIS deductions whenever you pay a subcontractor for construction work, unless they have gross payment status. This applies to:

• Payments for labour on construction projects
• Payments to sole traders, partnerships, and limited companies
• Each payment you make, not just the final invoice

Before making your first payment to any subcontractor, you must verify them with HMRC using the CIS online service. Verification tells you which deduction rate to apply.

Which deduction rate to apply

The deduction rate depends on the subcontractor's CIS registration status. HMRC tells you the rate when you verify the subcontractor:

How to treat materials costs

CIS deductions apply only to the labour element of the payment. You must exclude materials costs from the calculation before applying the deduction rate. This is a critical step that many contractors get wrong.

Step-by-step calculation process

Follow this process for every subcontractor payment. The deduction is calculated after excluding VAT and materials, then applied to the remaining labour element:

Additional worked example

Here is another example showing how the calculation works in practice:

Scenario: Unregistered subcontractor

An unregistered subcontractor (30% rate) submits an invoice for bricklaying:

• Invoice total (excluding VAT): 2,500
• VAT at 20%: 500
• Materials (bricks, cement, mortar): 800

Calculation

1. Gross amount (excluding VAT): 2,500
2. Deduct materials: 2,500 - 800 = 1,700 (labour element)
3. Apply CIS rate (30%): 1,700 x 0.30 = 510
4. CIS deduction to pay HMRC: 510

Payment breakdown

VAT note: This example assumes normal VAT charging applies. In most contractor-to-subcontractor situations - where both businesses are VAT registered, the work is within CIS, and you are not the end user - the VAT domestic reverse charge applies instead: the subcontractor must not charge VAT, and you account for the VAT on your own VAT return. Check the VAT treatment before processing any construction invoice with VAT added.

Key point: The higher 30% rate for unregistered subcontractors significantly reduces their take-home pay. Encourage your subcontractors to register with CIS to benefit from the lower 20% rate.

Paying the subcontractor

After calculating the deduction, pay the subcontractor the net amount:

• Net labour payment - the labour element minus the CIS deduction
• Materials - passed through in full (not subject to CIS)
• VAT - passed through in full where charged (not subject to CIS) - but note that under the VAT domestic reverse charge, most VAT-registered subcontractors must not charge you VAT on construction services within CIS

The subcontractor receives less than their invoice amount because you have deducted tax on their behalf. They can offset these deductions against their own tax liability when they file their Self Assessment or Corporation Tax return.

Payment and deduction statement

You must give the subcontractor a written statement within 14 days of the end of each tax month showing:

• Your name and employer PAYE reference
• Tax month the payment relates to
• Subcontractor's name and Unique Taxpayer Reference (UTR)
• Gross amount of payment (before deduction)
• Amount of any deduction
• Amount of any materials cost

Subcontractors need this statement to reclaim their deductions from HMRC.

Reporting to HMRC

The deductions you make must be reported on your monthly CIS return and paid to HMRC:

Monthly CIS return (CIS300)

File by the 19th of each month following the tax month. For each subcontractor you paid, report:

• Subcontractor name and UTR
• Verification number from HMRC
• Gross payment amount (before CIS deduction)
• Materials cost deducted
• CIS deduction amount

Payment to HMRC

Pay the total CIS deductions to HMRC by:

• 22nd of each month - for electronic payments
• 19th of each month - if paying by post

If you also run PAYE for employees, CIS deductions are paid together with PAYE and National Insurance using the same payment reference.

What if you get it wrong?

If you realise you have made an error:

• Deducted too much - adjust on a later return or refund the subcontractor and adjust your return
• Deducted too little - you may need to pay the shortfall to HMRC yourself
• Applied wrong rate - correct future payments and consider whether adjustments are needed

Record keeping

Keep detailed records of all CIS calculations and payments for at least 3 years after the end of the tax year. Records should include:

• Subcontractor invoices showing labour and materials breakdown
• Evidence of materials costs (receipts, supplier invoices)
• CIS deduction calculations for each payment
• Verification numbers from HMRC
• Copies of payment and deduction statements issued
• Monthly CIS return submissions

HMRC can fine you up to 3,000 GBP if you cannot produce CIS records when asked.

Common mistakes to avoid

• Deducting from the full invoice - always exclude VAT and genuine materials costs first
• Accepting inflated materials claims - request evidence and make reasonable estimates
• Using the wrong rate - always verify subcontractors before first payment and re-verify if needed
• Forgetting to re-verify - you must re-verify if a subcontractor was not on your return in the current or last 2 tax years
• Missing the payment deadline - set calendar reminders for the 19th/22nd of each month
• Not issuing statements - subcontractors need payment and deduction statements to reclaim tax

Next steps

After calculating CIS deductions:

1. Pay the subcontractor - the net amount after deduction, plus materials and VAT
2. Issue a payment and deduction statement - within 14 days of tax month end
3. Record the details - for your monthly return and records
4. File your monthly CIS return - by the 19th of the following month
5. Pay HMRC - by the 22nd (electronic) or 19th (post)

Related guides

• Register as a CIS contractor - how to register with HMRC before using subcontractors
• Verify a subcontractor's CIS status - how to verify subcontractors and get the correct deduction rate
• Submit your CIS monthly return - step-by-step guide to filing CIS300 returns
• Register as a CIS subcontractor - help your subcontractors register for the lower 20% rate
• VAT reverse charge for construction - when VAT treatment changes for construction services