CIS Deductions Explained: Rates, Materials, Statements & Tax Credits

A subcontractor sends you an invoice for £5,000 and CIS applies. The obvious question sounds simple: do you deduct 20% of the £5,000?

Not necessarily.

This is where CIS catches people out. The deduction rate might be 20%, but that does not mean you simply take 20% off the bottom of every invoice. VAT, qualifying materials and certain other costs can change the amount on which CIS is actually calculated.

For subcontractors, there is another side to the same problem. You may have had thousands of pounds of CIS deductions taken from your payments during the year, but those deductions are not simply lost income. They normally count towards your eventual tax position, provided they have been recorded and claimed correctly.

HMRC updated parts of its Construction Industry Scheme guidance again in August 2026, so it is worth getting the process right rather than relying on an old spreadsheet or the way somebody has “always done it”.

This guide explains how CIS deductions work, when the 0%, 20% and 30% rates apply, how materials affect the calculation, what should appear on a CIS deduction statement and what happens to deductions suffered by sole traders and limited companies.

What are CIS deductions actually for?

Under the Construction Industry Scheme, a contractor may have to withhold part of the money due to a subcontractor and pay it to HMRC.

Think of it as tax being collected in advance rather than as an extra tax charged on the subcontractor.

If a subcontractor invoices £2,000 and £400 is correctly deducted under CIS, the contractor pays the subcontractor £1,600 and accounts for the £400 to HMRC. The subcontractor still records the appropriate gross income in their accounts and later receives credit for the CIS deducted.

HMRC describes CIS deductions as advance payments towards the subcontractor’s tax and National Insurance position.

That distinction matters.

A CIS deduction is not normally the subcontractor’s final tax bill. The final position depends on profit, allowable expenses, business structure, other income and the CIS credits available.

If construction work makes up a large part of your business, keeping the CIS side separate from ordinary bookkeeping can prevent a lot of problems at year end. Our construction bookkeeping service is designed around that type of reconciliation rather than treating CIS as another bank transaction to categorise.

Who actually deducts CIS?

The contractor is responsible for checking whether CIS applies and, where required, verifying the subcontractor with HMRC.

HMRC then tells the contractor which deduction status should be used.

That point is important because a contractor should not simply decide that a subcontractor “looks registered” and apply 20%.

In broad terms:

CIS status	Deduction rate	What it usually means
Gross payment status	0%	The subcontractor has been approved to receive qualifying CIS payments without deduction
Registered and verified	20%	Standard CIS deduction
Unregistered or unable to be verified	30%	Higher-rate CIS deduction

HMRC currently confirms these as the three CIS deduction rates. A subcontractor with gross payment status is still within CIS. The difference is that the contractor pays qualifying invoices without withholding CIS tax.

If you regularly engage trades, labour-only subcontractors or other construction businesses and are unsure whether you should be operating CIS, our guide to CIS returns for contractors covers the contractor reporting side in more detail.

When does the CIS 20% deduction apply?

The CIS 20% deduction is the standard rate for a subcontractor who is registered under CIS and has been successfully verified at that rate.

Suppose a verified electrician carries out £3,000 of labour with no materials and no VAT involved.

The calculation is straightforward:

£3,000 × 20% = £600 CIS deduction

The contractor pays £2,400 to the electrician and reports the £600 deduction through CIS.

But many real invoices are not labour-only, which is why multiplying the invoice total by 20% can easily produce the wrong answer.

Why would CIS be deducted at 30%?

The CIS 30% deduction is the higher rate. HMRC says contractors will normally be instructed to use 30% where the subcontractor is not registered for CIS, cannot be verified or has provided business details that do not match HMRC’s records. This can create a painful cash-flow difference.

On £4,000 that is fully subject to CIS:

20% deduction = £800

30% deduction = £1,200

That is £400 less reaching the subcontractor from the same payment. If you believe 30% has been applied simply because your contractor could not verify you, check that the legal or trading name and UTR you supplied match the details used when you registered.

For subcontractors dealing with repeated verification, deductions and year-end CIS credits, our accountants for subcontractors service covers the accounting and tax side together.

When is the CIS deduction 0%?

A 0% deduction normally applies where HMRC confirms that the subcontractor has gross payment status.

That means the contractor pays the subcontractor without deducting CIS at source.

For example, a qualifying £10,000 payment under gross payment status would ordinarily result in:

CIS deduction: £0

Payment before any other adjustments: £10,000

Gross payment status can improve cash flow considerably, but it does not remove the subcontractor’s tax obligations. Tax still needs to be accounted for through the appropriate Self Assessment or company tax process.

HMRC applies conditions to gross payment status, including business, turnover and compliance requirements.

How to calculate a CIS deduction correctly

The easiest way to understand the calculation is to stop thinking of CIS as “20% off the invoice”.

Instead, think:

Invoice → remove amounts not subject to CIS → apply the HMRC deduction rate to what remains.

For a VAT-registered subcontractor, the CIS calculation will generally start with the payment excluding VAT. Qualifying direct materials and certain other permitted costs are then removed before applying the CIS percentage.

HMRC’s current guidance identifies amounts such as VAT, qualifying materials, consumable stores, certain fuel costs, plant hire and manufacture or prefabrication costs when working out the amount subject to deduction. Travelling expenses and fuel used for travelling are not treated the same way and remain within the relevant gross payment calculation.

A useful simplified formula is:

CIS deduction = qualifying payment after exclusions × CIS rate

The difficult part is usually not multiplying by 20%. It is deciding what belongs in the qualifying payment.

Worked example: CIS 20% deduction with VAT

Imagine a VAT-registered subcontractor invoices:

Labour: £2,000
VAT: £400
Total invoice: £2,400

There are no qualifying material costs.

VAT is excluded when calculating the CIS deduction:

£2,000 × 20% = £400 CIS deduction

The contractor therefore pays:

£2,400 invoice less £400 CIS = £2,000

Notice what did not happen.

The contractor did not deduct 20% of £2,400. Doing that would have produced a £480 deduction and overstated CIS by £80.

HMRC confirms that where a payment is subject to VAT, the CIS deduction is calculated from the VAT-exclusive payment.

If VAT and CIS are both appearing regularly in your construction accounts, it is worth reconciling them separately rather than assuming the same net figure should appear in both systems. Path’s VAT accounting service can be linked with the wider CIS bookkeeping process.

Worked example: CIS deduction on materials

Now suppose a subcontractor’s invoice is:

Labour: £3,000
Materials directly purchased for the job: £1,000
VAT: £800
Total invoice: £4,800

The subcontractor is VAT registered and HMRC has confirmed a 20% CIS rate.

First remove VAT:

£4,800 – £800 = £4,000

Then remove the qualifying direct materials:

£4,000 – £1,000 = £3,000

Now apply CIS:

£3,000 × 20% = £600

The contractor pays:

£4,800 – £600 = £4,200

So although the invoice was £4,800, the CIS deduction was £600, not £960.

This is one of the most common reasons the CIS figure on an invoice, bank payment and accounting software does not appear to match at first glance.

Worked example: CIS 30% deduction with materials

Take another invoice:

Labour: £1,500
Qualifying materials: £500
VAT: £400
Invoice total: £2,400

HMRC has instructed the contractor to deduct CIS at 30%.

Remove the VAT first:

£2,400 – £400 = £2,000

Then the qualifying materials:

£2,000 – £500 = £1,500

Apply 30%:

£1,500 × 30% = £450

Amount paid to the subcontractor:

£2,400 – £450 = £1,950

Again, the 30% rate is being applied to the amount subject to CIS, not blindly to the final invoice total.

CIS deduction on materials: what actually counts?

Materials are probably the most misunderstood part of CIS calculations.

A subcontractor cannot simply label a large part of an invoice “materials” to reduce the CIS deduction.

HMRC’s current guidance focuses on the direct cost actually incurred by that subcontractor for materials used in the particular construction contract. The contractor can ask for invoices, receipts or other evidence and is expected to make sure that the materials figure is reasonable.

This becomes especially important where there are several subcontracting levels.

If Company A engages Company B, which then engages Company C, Company B cannot automatically use material costs paid by Company C as though Company B purchased those materials itself. The deduction is based on the relevant subcontractor’s direct material cost for the contract being considered.

Plant hire can also qualify in some circumstances where the subcontractor actually hires plant from a third party for the job. A made-up “plant hire charge” for equipment the subcontractor already owns is not the same thing.

For builders managing several subcontractors and suppliers, this is exactly the sort of detail that needs to flow from job records into the monthly CIS return. See our accountants for builders service if your accounting needs to bring labour, materials, VAT and CIS together rather than deal with each one separately.

What is a CIS payment and deduction statement?

If a contractor deducts CIS from a subcontractor’s payment, the subcontractor needs evidence of what has been withheld.

That evidence is normally the CIS payment and deduction statement, sometimes shortened to PDS or simply called a CIS deduction statement.

HMRC requires a contractor to provide a statement to every subcontractor from whom a CIS deduction has been made.

A tax month runs from the 6th of one month to the 5th of the next.

The payment and deduction statement must be provided within 14 days after the end of that tax month.

For example, payments made in the tax month from 6 August to 5 September would normally need to be covered by a statement provided by 19 September.

The statement should identify the contractor and subcontractor and show the relevant payments, materials and CIS deductions. Where a subcontractor could not be matched and the higher rate was used, additional verification information can also be required.

The statement matters because it is the link between:

the invoice → the money received → CIS withheld → the tax credit eventually claimed.

Without that link, year-end CIS reconciliation becomes much harder.

What should subcontractors keep with their CIS statements?

Do not treat the statement as a piece of paperwork to look at once and forget.

For each contractor, it is sensible to keep the payment and deduction statements alongside the relevant invoices, payment/remittance records, bank receipts and evidence of material costs.

The figures should tell the same story.

If an invoice says £5,000, the bank shows £4,200 and the CIS statement says £800 was deducted, the accounts should be able to explain exactly why those three figures are different.

For businesses with dozens or hundreds of construction transactions, good bookkeeping becomes particularly valuable here because problems are much easier to correct monthly than a year later.

Contractors themselves also have formal CIS record-keeping responsibilities. HMRC currently requires records of gross payments, deductions and relevant material costs to be retained for at least three years after the end of the tax year concerned.

What are “CIS deductions suffered”?

You may see the phrase CIS deductions suffered in accounting software, payroll reports or conversations with your accountant.

It simply means CIS that somebody else has deducted from money due to your business.

For example, your limited company invoices a main contractor £20,000 and £3,000 is withheld under CIS.

Your company has suffered £3,000 of CIS deductions.

That £3,000 needs to be recorded separately from ordinary expenses because it may become a tax credit.

The situation can become more complicated where a construction company operates on both sides of CIS.

A company might:

• suffer CIS deductions when a main contractor pays it;
• make CIS deductions when it pays its own subcontractors.

Those are two different flows and should not be mixed together.

This is one of the areas covered by specialist construction accountants, particularly where the business is both a contractor and subcontractor at different points in the same project chain.

How limited companies claim CIS deductions suffered

This is an important distinction.

If your limited company has CIS deductions taken from payments it receives as a subcontractor, HMRC says you should not try to claim those deductions through the Corporation Tax return.

Instead, the company normally reports its CIS deductions suffered through its PAYE payroll reporting.

The company sends its normal Full Payment Submission and uses an Employer Payment Summary to report the year-to-date CIS deductions suffered. HMRC then offsets those amounts against qualifying PAYE and National Insurance liabilities.

If there is more CIS credit than can be used in that period, the remaining credit can be carried into a later month or quarter within the same tax year.

After the year ends, an eligible company with excess CIS deductions may be able to claim a refund. HMRC can first use the credit against outstanding PAYE or Corporation Tax liabilities before refunding or reallocating the remaining balance.

One of the biggest reconciliation mistakes is therefore seeing CIS on a limited company’s accounts and treating it as though it should simply reduce Corporation Tax directly on the Corporation Tax return.

It should be reconciled through the correct CIS and PAYE process.

What happens to CIS deductions for sole traders?

For a sole trader or partner, the route is different.

The business still records its full income rather than simply treating the net cash received as turnover.

The CIS deductions are then entered in the appropriate part of the Self Assessment return. HMRC uses the deductions as credit when working out the person’s final tax and National Insurance position.

If the deductions exceed the amount ultimately due, this can result in a CIS deduction refund. If the deductions are not enough, there may still be tax to pay.

So receiving money after a 20% CIS deduction does not mean your tax affairs for that income are finished.

Why CIS records so often fail to reconcile

A CIS problem rarely begins with a dramatic error. More often, small differences build up month after month.

A contractor calculates 20% from an invoice including VAT. A subcontractor records only the net amount received as sales. Materials are entered without checking who actually paid for them. One payment statement goes missing. Another contractor uses 30% because the verification details did not match. A limited company’s CIS suffered is left sitting in the balance sheet without being reported correctly through payroll.

By year end, the business may have perfectly real invoices and perfectly real bank payments, but none of the totals agree.

The most common issues we see when reviewing CIS records include incorrect VAT treatment, CIS being applied to the wrong material figure, 20% or 30% being used without the correct verification result, missing payment statements, duplicate statements, CIS suffered being posted as an expense, and limited-company deductions not agreeing with EPS submissions.

The best fix is normally a three-way reconciliation:

Invoices and accounting records ↔ contractor CIS statements ↔ amounts actually received or paid through the bank.

For a limited company, payroll and the CIS suffered balance also need to agree.

What if your CIS deduction statement is missing?

If you have been paid after a CIS deduction but the contractor has not sent the corresponding statement, do not leave it until the tax return is being prepared.

Ask the contractor for it.

HMRC’s CIS guidance allows a contractor to issue a replacement where a statement has been lost or did not arrive. The replacement should be clearly identified as a duplicate.

If the figures on the statement are wrong, raise the issue quickly while invoices, material receipts and payment records are still easy to trace.

A £200 discrepancy spotted this month is usually much easier to investigate than a £4,000 difference spread across twelve months of transactions.

Contractors still file CIS returns monthly even if they pay HMRC quarterly

This is another area where two different obligations get mixed together.

CIS reporting is monthly.

Contractors must tell HMRC about payments to subcontractors through the monthly CIS return. The normal deadline is the 19th following the end of the CIS tax month.

Some eligible businesses can make PAYE and CIS payments to HMRC quarterly rather than monthly. HMRC’s CIS340 guidance says contractors whose average monthly PAYE, National Insurance and CIS payments are below the relevant £1,500 threshold may choose quarterly payment.

But paying quarterly does not turn CIS reporting into a quarterly return.

The CIS returns still need to be submitted monthly.

If you are deducting CIS from subcontractors and struggling to keep verification, returns, statements and payment deadlines together, our CIS returns service is the more relevant starting point than waiting for the year-end accounts.

Contractor or subcontractor? Start with the CIS problem you actually have

CIS can look like one system, but the accounting problem is very different depending on which side of the payment you are on.

If you are a contractor paying subcontractors

Your main risks are usually verification, choosing the correct deduction rate, calculating materials correctly, filing monthly returns, issuing payment and deduction statements and paying the deductions to HMRC.

For those issues, start with our CIS returns service.

If you run a building company and want the wider accounting, bookkeeping, VAT and project-cost side managed as well, see accountants for builders.

If you are a subcontractor having CIS deducted

Your concern is usually whether the contractor has deducted the right amount, whether your statements agree with your income, how CIS deductions suffered should be recorded and how the credit reaches your tax account.

Start with our accountants for subcontractors.

For construction businesses that move between contractor and subcontractor roles, our broader construction accountants service is usually the better fit.

Have CIS deductions that don’t match your records?

One wrong statement can be fixed fairly quickly.

Twelve months of incorrect CIS calculations, missing material costs and unclaimed deductions can become a much bigger accounting problem.

Have CIS deductions that don’t match your records? Get a free CIS accounts review.

We can review the invoices, payment and deduction statements, bookkeeping records and CIS balances to help identify where the difference has come from and what needs correcting.

CIS deductions FAQs