Guide summary

Verify each subcontractor with HMRC before you first pay them, using details that exactly match their registration
Verify again if you have not included them on a return in the current or last 2 tax years
Deduct at 20% for a registered subcontractor you can verify, and 30% if they are not registered or you cannot verify them
Make no deduction if HMRC has given the subcontractor gross payment status
Ask for receipts for materials and keep them; if there is no evidence, estimate the cost
Do not take off travelling expenses, including fuel costs, or subsistence; they stay in the amount you deduct from
Pay the subcontractor the invoice amount less the deduction, then pay the deduction to HMRC
Give each subcontractor a payment and deduction statement and show each payment on your monthly return

Who must make a deduction

If you are a CIS contractor, you must deduct tax from each payment you make to a subcontractor for construction work, unless HMRC has told you to pay that subcontractor in full. You are a contractor if you pay subcontractors for construction work, or if your business is not construction but you have spent more than £3 million on construction in the 12 months since your first payment. The deduction counts as an advance payment towards the subcontractor's own tax and National Insurance bill, and you pay it over to HMRC.

Work out the deduction

Verify the subcontractor with HMRC

Do this before you first pay them. HMRC tells you whether to pay them in full or to deduct, and at which rate. Verify again if you have not included them on a return in the current or the last 2 tax years. The details you give must exactly match those they registered with.
Start from the invoice amount without VAT

If the subcontractor is VAT-registered, take off the VAT they charge. Where the VAT domestic reverse charge applies, they do not charge you VAT at all.
Take off what the subcontractor paid for directly

Subtract the cost of materials, consumable stores, fuel (except for travelling), plant they hired for the job and the cost of manufacturing or prefabricating materials. Ask for receipts and keep them. If there is no evidence, estimate the cost.
Apply the rate to what is left

The result is the amount you deduct and pay to HMRC. Pay the subcontractor the invoice amount less the deduction.
Record the amounts

Keep the gross payment, the cost of materials and the deduction for each payment. You need them for your monthly return and for the payment and deduction statement you give the subcontractor.

Which rate applies

CIS deduction rates

Construction Industry Scheme deduction rates for payments to subcontractors: 20% for registered subcontractors, 30% for unregistered or unverified ones and nothing for gross payment status. Rates are set by Treasury order and apply UK-wide.

Registered subcontractor rate: 20%
Unregistered or unverified subcontractor rate: 30%
Gross payment status rate: 0%
Set by: Treasury order (Finance Act 2004, s.61)
Deduction basis: Invoice total less VAT, materials, consumables, fuel and plant hire

When a contractor verifies a subcontractor, HMRC tells the contractor which rate to apply. The rates are set by Treasury order under section 61 of the Finance Act 2004 and do not change with each tax year.

20% if the subcontractor is registered for CIS and the contractor can verify them.
30% if the subcontractor is not registered with HMRC for CIS, or the contractor cannot verify them.
No deduction if HMRC has given the subcontractor gross payment status. The subcontractor receives the full payment and accounts for their own tax through Self Assessment or Corporation Tax.

The deduction is worked out on the invoice total after taking off VAT and what the subcontractor paid for materials, consumable stores, fuel (except for travelling), plant hire for the job, and manufacturing or prefabricating materials. The contractor can ask for receipts and, if there are none, estimates the cost of the materials.

What is the Construction Industry Scheme (opens in a new tab)

CIS contractor: make deductions and pay subcontractors (opens in a new tab)

CIS subcontractor: get paid under the scheme (opens in a new tab)

What counts as materials

CIS materials deduction rules

How materials, consumables, fuel and hired plant reduce the amount a contractor makes a CIS deduction from, and the evidence the contractor should keep.

A CIS deduction is not made from the part of a payment that represents the cost of materials the subcontractor has paid for. Start with the gross amount of the subcontractor's invoice, take away the VAT the subcontractor charged (if registered for VAT) and the other costs below, then apply the deduction rate to what is left.

Deduction is made from: Invoice total less VAT and the subcontractor's own materials costs
Formula: (Invoice - VAT - allowable costs) x deduction rate
Evidence: Ask the subcontractor for receipts showing they paid directly
No evidence: Estimate the cost of the materials

Costs you can take away before the deduction

You can take away the amount the subcontractor actually paid for these, used in the construction work:

materials, only if the subcontractor paid for them directly
consumable stores
fuel, except fuel for travelling
plant hired from a third party for the job, and consumables such as fuel needed to run it
the cost of manufacturing or prefabricating materials

If the subcontractor is not registered for VAT, you can also take away the VAT they paid on these items.

Costs that stay in the amount you deduct from

Travelling expenses, including fuel costs, and subsistence you pay to or for the subcontractor are part of the gross payment.
If the subcontractor owns the plant, including scaffolding, you cannot allow a notional charge for it. Fuel and other consumables used by that plant can still be treated as materials.
Plant hire with an operator for use on site is a construction operation, so it is not a materials cost.

Check what you are told

Check and keep records that the amount claimed for materials or plant hire is not overstated. If the materials element looks excessive, HMRC may recover any under-deduction from you.

Worked example

CIS materials deduction calculation example

Worked example of a CIS deduction for a registered subcontractor whose invoice includes VAT and materials.

A registered subcontractor (20% deduction rate) invoices you £1,200 for plastering. The invoice includes £200 VAT (20% of £1,000) and the subcontractor paid £200 for materials directly.

Invoice total: £1,200
VAT included: £200
Materials paid for by the subcontractor: £200
Amount the deduction is made from: £800 (£1,200 - £200 VAT - £200 materials)
CIS deduction at 20%: £160
Paid to the subcontractor: £1,040 (£1,200 - £160)
Paid to HMRC: £160

You pay the subcontractor £1,040 and pay £160 to HMRC. Your total outlay is £1,200. The £160 counts as an advance payment towards the subcontractor's tax and National Insurance bill.

In most contractor-to-subcontractor supplies within CIS where both businesses are VAT registered and the contractor is not the end user, the VAT domestic reverse charge applies. The subcontractor then does not charge VAT, and you account for it on your own VAT return. This example shows the position where VAT is charged normally.

If the subcontractor is not VAT-registered and HMRC tells you to deduct at the higher rate, the VAT they paid on materials counts as part of the cost of materials. On an invoice of £540 with £240 of materials including the VAT paid, the amount liable to deduction is £300, the deduction is £90 and you pay the subcontractor £450.

What happens after you deduct

Show the gross payment, the cost of materials and the deduction on your monthly return, pay the deductions over to HMRC and give each subcontractor a payment and deduction statement for the tax month.

Legal basis

Primary legislation and key regulations

Finance Act 2004 Primary 2004 · UK-wide Income Tax (Construction Industry Scheme) Regulations 2005 SI 2005 · UK-wide

Browse UK legislation legislation.gov.uk

Official guidance

CIS contractors: make deductions and pay subcontractors (opens in a new tab)

GOV.UK

VAT domestic reverse charge for building and construction services (opens in a new tab)

HMRC

CIS 340 - Contractor and subcontractor guide (opens in a new tab)

Publication · HMRC

Use the CIS online service (opens in a new tab)

HMRC

Calculate CIS deductions

Who must make a deduction

Work out the deduction

Verify the subcontractor with HMRC

Start from the invoice amount without VAT

Take off what the subcontractor paid for directly

Apply the rate to what is left

Record the amounts

Which rate applies

What counts as materials

Worked example

What happens after you deduct

Legal basis

Official guidance

Related guides in Business Tax Overview

Register as a CIS contractor

Verify subcontractors with HMRC under CIS

Submit your CIS monthly return

Register as a CIS subcontractor

Apply the VAT reverse charge on construction services