CIS Deduction Calculator

Summary

The Construction Industry Scheme (CIS) requires contractors to deduct money from payments to subcontractors and pass it to HMRC as an advance payment toward the subcontractor's tax and National Insurance. Getting the deduction calculation wrong — most commonly by deducting from the whole invoice including materials, or applying the wrong rate because verification wasn't done — creates real cash flow problems for subcontractors and compliance risk for contractors.

The calculation itself is straightforward once the qualifying materials figure is correctly identified: strip out materials cost and VAT from the gross invoice amount, apply the subcontractor's verified deduction rate to what remains, and pay the subcontractor the balance. The complexity in practice comes from three places: correctly separating labour from materials on an invoice that doesn't itemise them clearly, verifying the subcontractor's status with HMRC before the first payment (which determines whether 20%, 30% or 0% applies), and — for VAT-registered subcontractors working for VAT-registered contractors in construction — correctly applying the domestic reverse charge for VAT alongside the CIS deduction.

This calculator sets out the formula, the three deduction rates and what determines which applies, and worked examples covering a standard registered subcontractor, an unverified one, and a gross payment status holder, plus how VAT and the domestic reverse charge interact with the CIS figure.

Key Facts

• CIS deduction rates — 20% for verified/registered subcontractors, 30% for unregistered or unverified subcontractors, 0% for subcontractors with gross payment status
• Deduction basis — the deduction applies only to the labour element of a payment; materials, VAT, and certain other direct costs incurred by the subcontractor (such as the cost of materials, but not the subcontractor's own labour or profit margin on those materials) are excluded from the calculation
• Verification requirement — a contractor must verify a new subcontractor with HMRC (via the CIS online service or compatible software) before making the first payment, which returns the correct deduction rate to apply
• CIS300 monthly return — contractors must submit a CIS return to HMRC by the 19th of each month following the tax month in which payments were made
• Payment and deduction statement — the contractor must give the subcontractor a statement showing gross amount, cost of materials, and amount deducted, for every payment where a deduction is made
• Gross payment status — allows a subcontractor to be paid in full without any CIS deduction; requires passing HMRC's business test, turnover test, and compliance test, with a minimum turnover threshold in the region of £30,000 for a sole trader and higher aggregate thresholds for partnerships and companies
• Compliance test changes — HMRC widened the compliance test in April 2024 to include VAT filing and payment history alongside Income Tax, Corporation Tax, and PAYE compliance, meaning a subcontractor with a poor VAT compliance record can now lose gross payment status even if their other tax affairs are in order
• What counts as "materials" — the direct cost of materials genuinely incurred by the subcontractor to complete the work; consumable items, plant hire, and travel/subsistence are treated differently depending on how they're invoiced and should be checked against current HMRC guidance rather than assumed
• CIS applies to labour, not to the whole construction supply chain — CIS deductions apply to payments for construction operations under a contract between a contractor and subcontractor; it does not apply to payments for materials-only supply with no labour element, or to employees paid through PAYE
• Domestic Reverse Charge for VAT (construction services) — in force since 1 March 2021, this shifts responsibility for accounting for VAT from the supplying subcontractor to the receiving contractor on most B2B construction services where both parties are VAT-registered and CIS-registered; it runs alongside, not instead of, the CIS deduction calculation
• Verification "matched" vs "unmatched" — HMRC's verification response tells the contractor whether the subcontractor is matched at the 20% (net) rate, matched at 0% (gross) rate, or unmatched, in which case the 30% rate must be applied until verification succeeds
• Record retention — contractors must keep CIS records (verification results, deductions made, monthly returns) for at least three years

Quick Reference Table

Detailed Guidance

How the CIS Deduction Is Calculated (Step-by-Step)

1. Establish the gross invoice amount, excluding VAT.
2. Identify the qualifying materials cost genuinely incurred by the subcontractor — this must be itemised or reasonably evidenced, not an arbitrary estimate.
3. Subtract the materials cost from the gross invoice amount to arrive at the labour element.
4. Apply the subcontractor's verified deduction rate (20%, 30%, or 0%) to the labour element only.
5. Subtract the resulting deduction from the gross invoice amount to arrive at the net payment due to the subcontractor.
6. Add VAT (or apply the domestic reverse charge treatment where applicable) after the CIS calculation, since VAT sits outside the CIS deduction base entirely.

Formula:

Labour element      = Gross invoice (excl. VAT) − Materials cost
CIS deduction       = Labour element × Deduction rate (20% / 30% / 0%)
Net payment due      = Gross invoice (excl. VAT) − CIS deduction
Total paid to sub.  = Net payment due + VAT (or reverse charge treatment, see below)

Verification Status and Deduction Rates

Before the first payment to a new subcontractor, the contractor must verify them with HMRC using the subcontractor's Unique Taxpayer Reference, National Insurance number (for a sole trader), or company registration details. HMRC's response falls into one of three outcomes:

• Verified at net (20%) rate — standard registered subcontractors
• Verified at gross (0%) rate — subcontractors holding gross payment status
• Unmatched — HMRC cannot match the details provided, or the subcontractor isn't registered; the contractor must apply the 30% rate until verification succeeds

Verification isn't a one-off action for the life of the relationship — contractors should re-verify periodically and HMRC may notify a contractor directly if a subcontractor's status changes (for example, if gross payment status is withdrawn following a compliance failure).

What Counts as "Materials" (Deductible Exclusions)

Only the genuine direct cost of materials incurred by the subcontractor to carry out the work is excluded from the deduction calculation — this is not the same as everything on the invoice that isn't strictly "labour hours." A subcontractor's own profit margin added on top of materials cost, for example, remains part of the labour element for CIS purposes in some interpretations, so invoices should clearly separate the materials cost actually incurred from any markup, and contractors should not simply accept a subcontractor's stated "materials" figure without reasonable evidence (a receipt, a supplier invoice, or a clearly itemised breakdown). Getting this wrong in either direction — deducting from materials that should be excluded, or accepting an inflated materials figure that shelters labour income from the correct deduction — creates compliance risk for the contractor.

Worked Examples

Example 1: Registered and verified subcontractor (20% rate)

An invoice totals £3,000 excluding VAT, made up of £800 of materials and £2,200 of labour.

• Labour element: £3,000 − £800 = £2,200
• CIS deduction: £2,200 × 20% = £440
• Net payment due: £3,000 − £440 = £2,560
• VAT at 20% (assuming standard invoicing, not reverse charge): £600 added on top
• Total paid to subcontractor: £2,560 + £600 = £3,160

Example 2: Unregistered/unverified subcontractor (30% rate)

Same invoice — £3,000 total, £800 materials, £2,200 labour — but the subcontractor is unregistered.

• Labour element: £2,200 (unchanged)
• CIS deduction: £2,200 × 30% = £660
• Net payment due: £3,000 − £660 = £2,340
• VAT and total paid follow the same logic as Example 1, adjusted for the lower net payment

Example 3: Gross payment status subcontractor (0% rate)

Same invoice again, but the subcontractor holds gross payment status.

• CIS deduction: £0
• Net payment due: the full £3,000
• VAT added as normal (or reverse-charged, depending on the parties' VAT status)

The only variable across all three examples is the deduction rate applied to the labour element — the materials figure and the underlying job cost don't change. This is why correctly verifying subcontractor status before the first payment matters so much: getting it wrong doesn't just create an accounting correction, it directly changes the cash the subcontractor receives.

Domestic Reverse Charge VAT Interaction

Where both the contractor and subcontractor are VAT-registered and the work falls within the scope of the Construction Industry Domestic Reverse Charge (in force since 1 March 2021), the subcontractor does not add VAT to the invoice at all. Instead, the invoice must state that the reverse charge applies and show the VAT rate and amount that would have been charged, for the contractor's own records — the contractor then accounts for that VAT directly to HMRC rather than paying it to the subcontractor. This runs entirely separately from the CIS deduction calculation above: CIS deducts from the labour element of the payment; the reverse charge changes who accounts for VAT on the whole supply. The two mechanisms are commonly confused but are independent of each other and both apply, where relevant, to the same invoice.

Monthly Returns and Payment/Deduction Statements

Contractors must submit a CIS300 monthly return to HMRC by the 19th of the month following the tax month in which payments were made, detailing all subcontractors paid, amounts paid, materials excluded, and deductions made. Separately, the contractor must issue each subcontractor a written payment and deduction statement for every payment where CIS was deducted, showing the gross amount, materials cost excluded, and the deduction taken — this is the document a subcontractor uses to reconcile their own tax position and claim the deduction back against their tax liability at Self Assessment or through their company's tax return.

Frequently Asked Questions

What happens if I pay a subcontractor before verifying them with HMRC?

The contractor should apply the 30% deduction rate for any payment made before successful verification, since an unmatched or unverified subcontractor cannot be assumed to qualify for the 20% or 0% rate. Paying at the wrong (lower) rate without verification is a compliance failure that can result in the contractor being liable for the shortfall.

Can a subcontractor's materials cost be excluded from CIS deductions if it isn't separately itemised on the invoice?

In practice, contractors should expect and require a reasonably itemised or evidenced materials figure before excluding it from the deduction calculation. An invoice that states a single lump sum with no materials breakdown gives the contractor no defensible basis to exclude any of it, and HMRC can challenge an unsupported materials exclusion during a compliance check.

How does a subcontractor get gross payment status?

By passing HMRC's three tests: a business test (genuine construction business, run mainly through a bank account), a turnover test (minimum net construction turnover over the preceding 12 months, excluding VAT and materials, broadly in the region of £30,000 for a sole trader with higher aggregate thresholds for partnerships and companies), and a compliance test (tax returns and payments, including VAT since April 2024, filed and paid on time over a recent compliance history period).

Does CIS apply to VAT?

No — CIS deductions are calculated on the labour element of the payment excluding VAT entirely. VAT (or the domestic reverse charge treatment, where applicable) is applied separately and after the CIS calculation.

What if HMRC removes a subcontractor's gross payment status partway through a contract?

HMRC will notify the subcontractor, and the contractor should re-verify before the next payment to confirm the current status — continuing to pay at 0% after gross status has been withdrawn is a compliance failure for the contractor, not just the subcontractor.

Regulations & Standards

• Finance Act 2004, Sections 57-77 — the primary legislation establishing the Construction Industry Scheme

• Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) — the detailed regulations governing verification, deduction rates, returns, and statements

• VAT Notice 735 — Domestic reverse charge for building and construction services — HMRC guidance on how the reverse charge interacts with CIS-registered construction supply chains

• HMRC CIS340 — Guide for contractors and subcontractors, HMRC's principal published guidance on operating the scheme

• HMRC — Construction Industry Scheme (CIS) — UK Government

• HMRC — CIS340: Construction Industry Scheme guide for contractors and subcontractors — UK Government

• HMRC — Verify a subcontractor — UK Government

• HMRC — VAT Notice 735: Domestic reverse charge procedure — UK Government

• cis construction industry scheme — overview of CIS deduction rates, gross payment status thresholds, and monthly return obligations

• cis subcontractor verification — step-by-step HMRC verification process for new subcontractors

• domestic reverse charge vat guide — how the VAT domestic reverse charge for construction services interacts with CIS invoicing

• markup to margin explained — related financial calculation reference for pricing and margin work