CIS Deductions Explained: Why 20%, 30% or Nothing Comes Off Your Invoice

If you're subcontracting on building work in the UK and your invoices keep coming back short, you've met the Construction Industry Scheme. Most subcontractors know money gets taken off. Far fewer know how much should be taken off, what it should be taken off, or that a lot of them are quietly overpaying every single year.

This is a plain-English explanation of how CIS deductions actually work.

The three rates

There are only three numbers to remember.

30% — you're not registered. If you haven't registered with HMRC under CIS, the contractor paying you has to withhold 30%. This is the default, and it's the expensive one.

20% — you're registered. Register as a subcontractor and the rate drops to 20%. Registering is optional for subcontractors, and it's hard to think of a reason not to. Ten percent of your labour on every invoice is a meaningful amount of money to give up for a form you fill in once.

0% — you have gross payment status. If you're registered and your tax affairs are up to date, you can apply for gross payment status. Contractors then pay your invoices in full and you settle your tax yourself through self assessment. Better for cash flow, more responsibility on you.

Worth being clear: registering for CIS is optional if you're the subcontractor. It is not optional if you're the contractor engaging other self-employed workers — that registration is mandatory. Plenty of trades are both at once, subcontracting on one job and hiring on another.

The bit that costs people money: it's labour only

This is the single most useful thing to know, and it's the one most often got wrong.

CIS deductions apply to your labour. They do not apply to materials.

If your invoice includes materials, plant hire, tool hire or similar direct expenses, those should be paid to you in full. As the Low Incomes Tax Reform Group puts it, "if your invoice includes direct expenses such as for materials or tool hire, then tax should not be withheld from these amounts, so you should be paid 100% of these costs."

So an invoice for £2,000 made up of £1,200 labour and £800 materials, with you registered at 20%, should have £240 withheld — 20% of the labour — not £400.

That difference only shows up if your invoice separates labour from materials clearly. If you send a single line saying "Bathroom refit — £2,000", you're inviting a deduction on the whole lot. Itemise labour and materials separately on every CIS invoice. It is the cheapest money you will ever save.

What work is actually covered

CIS covers most construction work: building, civil engineering, demolition, site clearing, repairs and decorating, installing power systems, and traffic management for construction purposes.

It does not cover work you supply directly to a homeowner. If a private customer hires you to redo their kitchen and pays you themselves, CIS doesn't come into it. The scheme is about contractor-to-subcontractor payments, not customer-to-trade ones.

That distinction matters for anyone running a mixed book — some domestic work, some subcontracting. Only the subcontracted side is in scope.

VAT and the reverse charge

If you're VAT registered, the domestic reverse charge has applied to most construction services since 1 March 2021. In broad terms, for services between VAT-registered businesses in the CIS chain, the customer accounts for the VAT rather than you charging it.

The interaction with CIS is straightforward once you see it: CIS deductions are calculated on the labour element, and the VAT is handled separately under the reverse charge rules. Your invoice needs to be right on both counts, which is another argument for a clear, itemised layout rather than a single lump sum.

Why most subcontractors get a refund

Here's the part that surprises people.

On your tax return you declare the gross amount you invoiced, not the net amount that landed in your bank. The CIS deductions already taken are then credited against your overall tax bill.

But that 20% was withheld without any regard for your personal allowance or your business expenses. It's a flat deduction applied before anyone worked out what you actually owe. For most sole traders that means too much has been taken across the year — so once the return is filed, there's a refund.

This is why keeping your CIS deduction statements matters. Every contractor who deducts from you should give you one. They are the evidence for the credit you're claiming. Losing them is how a refund turns into an argument.

Four things worth doing

Register, if you haven't. The gap between 30% and 20% is pure loss.

Split labour and materials on every invoice. Without it you risk a deduction on money that was never yours to be taxed on.

Keep every deduction statement. File them as they arrive rather than hunting for them in January.

Check your real margin, not your invoice total. A £2,000 job with £800 of materials, 20% withheld on labour and a day of your time in it is a very different job from what the invoice says. If you're not sure what a job actually made you, our free job profit calculator works it out in about a minute.

One caveat

This is general information about how the scheme works, not tax advice, and your own situation may have wrinkles this doesn't cover — particularly around gross payment status, the reverse charge, or if you operate through a limited company. HMRC's own CIS guidance is the authority, and an accountant who works with trades is worth their fee. If anything here conflicts with what HMRC or your accountant tells you, believe them, not us.

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