What is the Construction Industry Scheme and who does it apply to?
The Construction Industry Scheme (CIS) is HMRC's way of collecting tax in advance from people who do construction work. Under CIS, a contractor deducts money from a subcontractor's payments and passes it straight to HMRC. That money counts towards the subcontractor's Income Tax and National Insurance bill for the year.
It applies to most construction work in the UK: building, decorating, demolition, repairs, site preparation, and installing systems like heating or power. If you're a subcontractor doing this kind of work for a contractor, your payments will normally have CIS deductions taken before you're paid.
Two roles matter:
- Contractor — a business that pays subcontractors for construction work. They must register for CIS, verify subcontractors, make deductions, and file monthly CIS returns.
- Subcontractor — a business or sole trader doing the work and getting paid. You don't have to register, but if you don't, deductions are taken at the higher 30% rate.
Plenty of businesses are both contractor and subcontractor on different jobs. If your business spends more than £3 million a year on construction over a rolling 12-month period, you may also be a "deemed contractor" even if construction isn't your main trade.
CIS doesn't change how you invoice in terms of the legal basics. Your invoice still needs everything a normal one does: a unique number, your details, the customer's details, a clear description, dates, and the amounts due. If you're a sole trader, your own legal name has to appear, alongside any trading name. Our guide to a free UK invoice template covers those fundamentals.
What are the CIS deduction rates?
There are three CIS deduction rates, and the contractor applies whichever one matches your registration status with HMRC.
| Status | Deduction rate | When it applies |
|---|---|---|
| Registered subcontractor | 20% | You've registered for CIS as a subcontractor and HMRC verifies you at standard rate |
| Unregistered subcontractor | 30% | You haven't registered for CIS, so the contractor must deduct at the higher rate |
| Gross payment status | 0% | HMRC has approved you for gross payment — you're paid in full and settle your own tax later |
Registering is straightforward and worth doing. The 10-percentage-point gap between 20% and 30% is a real cashflow difference, and you get the over-deduction back eventually rather than losing it. Gross payment status is for established businesses that pass HMRC's turnover, compliance, and business tests. With gross status you receive the full invoice amount and account for all your tax through Self Assessment or Corporation Tax instead.
One detail that catches people out: the rate is decided by the contractor verifying you with HMRC, not by you. If you're newly registered and the contractor verifies you before HMRC has processed your registration, you might still get deducted at 30% on an early invoice. It corrects itself, but it's worth checking your status is active before the first payment run.
What is the CIS deduction taken from — labour or materials?
The CIS deduction is taken from the labour element only. It is never applied to materials, and never to VAT.
This is the single most important rule for getting a CIS invoice right. When you split your invoice, the contractor only calculates the deduction on what you charged for your work. The following are excluded from the deduction:
- Materials you bought for the job (bricks, timber, fixings, paint, and so on)
- Plant hire where you've hired equipment in
- Fuel (except for travelling)
- VAT charged on the invoice
- Manufacturing or prefabricating materials off-site
So if you don't separate labour from materials clearly, the contractor is entitled to treat the whole lot as labour and deduct CIS on everything. That hits your cashflow for no reason. Always itemise. A clean split protects you, and a tool like our invoice editor makes it easy to keep labour and materials on separate lines with their own subtotals.
How do you lay out a CIS invoice? A worked example
Lay out a CIS invoice by listing labour and materials separately, applying VAT (or the reverse charge), then showing the CIS deduction on labour only and the net amount payable.
Here's a worked example. Say you're a registered subcontractor (20% rate) on a job with £2,000 of labour and £500 of materials, and standard-rate VAT applies.
| Line | Amount |
|---|---|
| Labour | £2,000.00 |
| Materials | £500.00 |
| Subtotal (ex-VAT) | £2,500.00 |
| VAT at 20% | £500.00 |
| Total inc-VAT | £3,000.00 |
| Less CIS deduction (20% of £2,000 labour) | −£400.00 |
| Net payable to you | £2,600.00 |
Walk through the figures:
- Labour and materials are listed separately so the deduction base is obvious.
- VAT is calculated on the full ex-VAT subtotal (£2,500), giving £500. CIS does not reduce the VAT.
- The CIS deduction is 20% of the £2,000 labour only = £400. Materials and VAT are untouched.
- The contractor pays you £2,600 and sends the £400 to HMRC on your behalf.
If you were unregistered, the contractor would deduct 30% of £2,000 = £600, and pay you £2,400. With gross payment status, no deduction is taken and you'd receive the full £3,000.
It's good practice to state the CIS deduction explicitly on the invoice so there's no dispute about what you should be paid. CIS invoices are a specific document type, and our document types feature supports the standard invoice formats UK businesses need. For the basic mechanics of building any invoice, see how to create an invoice.
How does the VAT reverse charge interact with CIS?
For most construction services between VAT-registered businesses, the VAT domestic reverse charge applies. That means you don't add VAT to the amount the contractor pays you. Instead, the contractor accounts for the VAT on their own VAT return.
The reverse charge applies when all of these are true: the supply is a construction service within CIS, both parties are VAT-registered, the customer isn't the end user (they're going to sell the work on), and the standard or reduced rate of VAT applies. If those conditions are met, you must use the reverse charge rather than charging VAT in the normal way.
On a reverse-charge CIS invoice, you:
- Show the VAT rate and the VAT amount that would apply, for the customer's reference
- Do not add that VAT to the total you're asking the contractor to pay
- Add a clear statement, for example: "Reverse charge: customer to account for VAT to HMRC."
Reworking the earlier example under the reverse charge: labour £2,000 + materials £500 = £2,500. You note VAT at 20% (£500) is reverse-charged, so you don't collect it. The contractor still deducts CIS of £400 from the £2,000 labour, and pays you £2,100 (£2,500 less the £400 deduction). The contractor handles the £500 VAT on their own return.
The reverse charge and CIS overlap because they target the same construction supply chain, but they're separate rules. CIS is about income tax deducted from labour; the reverse charge is about who reports the VAT. Get both right on the same invoice and you'll avoid the two most common construction-invoicing errors. If reverse-charge VAT is new to you, our UK VAT feature and UK VAT rates explained cover the wider rules.
How do you get the CIS deduction back?
You reclaim CIS deductions through your tax return, because they're advance payments against the tax you owe. How you do it depends on your business structure.
Sole traders and partnerships claim through Self Assessment. On your tax return you declare your full income and the total CIS deductions taken during the year. HMRC offsets those deductions against your Income Tax and Class 4 National Insurance. If you've had more deducted than you owe — which is common, because 20% of gross labour often exceeds the actual tax due after expenses and allowances — HMRC refunds the difference.
Limited companies that are subcontractors reclaim CIS deductions by setting them against the PAYE, National Insurance, CIS, and Student Loan amounts they pay to HMRC each month or quarter through their payroll. Any surplus at the end of the tax year can be set against Corporation Tax or refunded.
To make a claim, keep every CIS payment and deduction statement the contractor gives you. They're legally required to give you a statement for each tax month within 14 days of the end of that month (by the 19th). Those statements are your evidence, so file them as carefully as the invoices themselves. Good payment tracking helps you reconcile what was deducted against what you invoiced, especially across multiple contractors.
A practical tip: don't wait until January to total up your CIS. Reconcile each month as statements arrive, so a missing or wrong deduction gets queried while the contractor still remembers the job.
Keeping CIS invoicing organised
CIS invoicing is mostly about discipline: split labour from materials, apply the deduction to labour only, handle VAT correctly (usually via the reverse charge), and keep every deduction statement for your return. Get those four things right and the scheme is predictable rather than painful.
If you invoice the same contractors regularly, recurring invoices save time on repeat jobs, and built-in payment reminders keep slow payers moving. You can build a compliant CIS invoice for free in Invoify's invoice editor, or see the pricing if you outgrow the free plan's limits.