Before we start: this is general guidance to help you understand how CIS invoicing works - it is not tax or legal advice. CIS rules, rates and thresholds can change. Always confirm the current rules and your own position with HMRC or a qualified accountant before acting.

What CIS is, and who it applies to

The Construction Industry Scheme (CIS) is an HMRC scheme that governs how payments for construction work flow between businesses. Under CIS, a contractor deducts money from a subcontractor's payment and passes it to HMRC. Those deductions count as advance payments towards the subcontractor's tax and National Insurance.

Two roles matter, and a business can be both at once:

  • Contractor - a business that pays subcontractors for construction work. This includes mainstream construction firms and, in some cases, businesses outside construction that spend significantly on construction operations.
  • Subcontractor - a business that carries out construction work for a contractor and gets paid for it.

If you're a main contractor who also takes on work for a larger firm, you are a contractor when you pay your subbies and a subcontractor when you invoice the firm above you. CIS broadly covers construction operations such as site preparation, building work, alterations, repairs, demolition and installation - though some work and some businesses sit outside it. When in doubt about whether a particular activity is caught, check HMRC's guidance.

Registration, verification and the three deduction rates

Both contractors and subcontractors should register for CIS with HMRC. Registration isn't strictly mandatory for a subcontractor, but not registering means a higher deduction is taken - so in practice almost everyone registers.

Before a contractor pays a new subcontractor, they verify them with HMRC. Verification confirms whether the subcontractor is registered and which deduction rate to apply. The result determines one of three rates the contractor must use on the qualifying part of the payment:

Status Rate When it applies
Gross payment status 0% Subcontractor has been granted gross status by HMRC (having met its qualifying tests). No deduction is taken - they're paid in full and settle their tax separately.
Registered & verified 20% The standard rate for a subcontractor who is registered under CIS and verified by the contractor.
Unverified / unregistered 30% Applied where the subcontractor isn't registered, or can't be matched/verified by HMRC. The higher rate is essentially the cost of not being on the system.

The 0% / 20% / 30% structure is one of the most settled parts of CIS. The practical takeaway: always verify before you pay, keep the verification reference, and apply the rate HMRC tells you to - not the rate you assume.

What CIS deductions actually apply to

This is the single most misunderstood part of CIS invoicing, and the most common source of errors. The deduction is taken from the labour element only. It is not taken from the whole invoice.

A CIS deduction is calculated on the payment excluding:

  • Materials - the direct cost of materials the subcontractor has paid for and is recharging.
  • Plant hire where it is genuinely hired in (treatment can differ for plant the subcontractor owns - check the specifics).
  • Consumables and certain other allowable costs that HMRC treats as outside the labour value.
  • VAT - CIS is calculated on the net amount; VAT sits separately (and, for many construction supplies between VAT-registered businesses, the domestic reverse charge applies).

So if a subcontractor invoices £5,000 of labour plus £2,000 of materials, a 20% deduction is £1,000 (20% of the £5,000 labour) - not £1,400. Deducting from the materials too would over-deduct, short-pay the subcontractor, and create a mess to correct later.

This is exactly why splitting labour and materials clearly on the invoice matters. If the split isn't shown, the contractor may have to treat the whole amount as labour and deduct from all of it. A clear breakdown protects the subcontractor's cash flow and gives the contractor a defensible figure.

How a CIS-aware invoice should be laid out

There's no single mandated template, but a CIS-aware invoice (or payment application) makes the deduction obvious and easy to check. A clear layout typically shows:

  1. The subcontractor's details, including their UTR (Unique Taxpayer Reference), and the contractor's details.
  2. A clear breakdown of labour and materials as separate line items or subtotals.
  3. The net total, with materials and other excluded costs identified.
  4. The CIS deduction, shown as the rate (0/20/30%) applied to the labour element, with the resulting amount.
  5. VAT handled correctly - or a reverse-charge note where it applies - calculated on the net, not after the CIS deduction.
  6. The amount actually payable after the CIS deduction.

Getting the order right matters: CIS is deducted from the labour value, while VAT is accounted for on the net supply. They are two separate calculations and shouldn't be confused with one another.

Monthly obligations: returns and statements

CIS isn't just about the invoice - it carries ongoing monthly duties for the contractor.

Contractor monthly returns

Contractors report their CIS payments and deductions to HMRC on a regular monthly cycle, covering the subcontractors they've paid and the deductions made. Returns are filed even in quieter periods, and late or missing returns can attract penalties - so keeping the underlying records tidy throughout the month saves pain at filing time.

Payment & deduction statements

For every subcontractor a contractor makes a CIS deduction from, the contractor must give that subcontractor a payment and deduction statement for each relevant period. It records the gross payment, the cost of materials accounted for, and the amount deducted. Subcontractors rely on these statements as proof of deductions already paid towards their tax - so they need to be accurate, complete and issued reliably, not reconstructed months later.

How retention and contra-deductions interact with CIS

Construction payments rarely stop at a clean labour figure. Two common adjustments sit alongside CIS:

  • Retention - a percentage held back from each payment and released later (often part on practical completion, the balance at the end of the defects period). Retention affects when value is paid, and the CIS treatment follows the labour value as it's actually paid - so the timing of the deduction tracks the timing of the payment.
  • Contra-deductions - amounts a contractor sets against a subcontractor's payment (for example, for plant, welfare, materials supplied, or back-charges). These reduce what's paid, and care is needed so that the CIS calculation is still applied to the correct underlying labour value rather than a figure that's already had unrelated costs netted off.

The principle to hold onto: retention and contra-deductions change the cash that moves, but the CIS deduction is still a calculation on the labour element. Keeping those layers separate and auditable is what stops month-end reconciliation turning into guesswork. We go deeper on this in our retention & deductions overview.

Common CIS invoicing mistakes

Most CIS problems aren't exotic - they're the same handful of avoidable slips, repeated:

  • Deducting from materials. Applying the rate to the whole invoice instead of the labour element - over-deducting and short-paying the subbie.
  • Using the wrong rate. Applying 20% to an unverified subcontractor (should be 30%), or deducting from someone with gross status (should be 0%).
  • Skipping verification. Paying a new subcontractor before verifying, then having to correct the rate retrospectively.
  • Missing or late statements. Not issuing payment and deduction statements, leaving subcontractors without proof of deductions.
  • No audit trail. Figures living in spreadsheets and emails, so nobody can reconstruct how a deduction was calculated months later.
  • Confusing CIS and VAT. Mixing up the order of the two calculations, or mishandling the domestic reverse charge.

A practical CIS invoicing checklist

  • Register for CIS with HMRC - as a contractor, subcontractor, or both.
  • Verify every new subcontractor before the first payment, and record the verification reference.
  • Apply the correct rate from verification: 0% (gross), 20% (registered/verified) or 30% (unverified).
  • Split labour and materials clearly on every invoice or application.
  • Calculate the CIS deduction on the labour element only - never on materials or VAT.
  • Handle VAT separately, applying the domestic reverse charge where it's due.
  • Apply retention and any contra-deductions without distorting the underlying labour figure.
  • Issue payment and deduction statements to every subcontractor you deduct from.
  • File contractor monthly returns on time.
  • Keep a clear, retrievable audit trail for every figure.

How software keeps CIS invoicing correct - automatically

Every rule above is simple in isolation. The difficulty is doing all of them, correctly, on every invoice, across dozens of subcontractors, every month - by hand. That's where spreadsheets quietly leak money. DuoApp is built to make CIS invoicing correct by default rather than by vigilance:

  • Verification status on each subcontractor. Each subbie carries their CIS status, so the right rate is attached to the right person from the start.
  • Automatic labour / materials split. Invoices and applications separate labour from materials, so the deduction is only ever taken from the qualifying labour value.
  • Correct rate applied. 0%, 20% or 30% is applied automatically based on the subcontractor's status - no mental arithmetic, no copy-paste slips.
  • Statements generated. Payment and deduction statements are produced from the same data that drives the invoice, so subcontractors get accurate records without you rebuilding them.
  • Retention handled. Retention is tracked and released against the right milestones, sitting cleanly alongside the CIS calculation rather than tangled into it.
  • Full audit trail. Every figure is traceable back to the work, the rate and the date - so month-end and any HMRC query are a lookup, not an investigation.

It's the same job your team already does - just without the manual deductions, the chased statements, and the spreadsheet that only one person fully understands. See it in context on retention & deductions and auto invoices.

A reminder: the figures and mechanisms above describe well-established CIS fundamentals, but they're general guidance rather than tax advice. Confirm current rates, thresholds and your specific obligations with HMRC or your accountant before relying on them.