Under the Construction Industry Scheme (CIS), contractors deduct money from a subcontractor’s payments and pass it to HM Revenue and Customs (HMRC).
The deductions count as advance payments towards the subcontractor’s tax and National Insurance.
Contractors must register for the scheme. Subcontractors don’t have to register, but deductions are taken from their payments at a higher rate if they’re not registered.
Every month contractors have to file a CIS return online and issue Deduction Statements to Subcontractors.
But many people are confused as to what to put in the boxes on the return, below is the official guidance.
Deductions at the standard rate
Examples D1 to D3 show deductions at the standard rate of 20% which was the rate in force at the time of writing this guide.
Example D1
Where no materials are supplied (‘labour-only’)
A labour-only subcontractor does work on site for £200
Total payment £200
Amount deducted at 20% = £40
Net payment to subcontractor £160
The contractor calculates the deduction (£40), which has to be paid to our accounts office. The labour-only subcontractor receives the balance of £160.
Entries on the contractor’s monthly return
In example D1, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £200
Direct cost of materials used £0
Amount deducted £40
Example D2
The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’) and the contractor has paid the subcontractor’s expenses.
Where the subcontractor isn’t registered for VAT, any VAT they had to pay on materials should be included in the cost of materials when calculating the CIS deduction.
Where expenses, for example accommodation, mobile phone and fuel costs are paid to the subcontractor, the amounts should be included in the subcontractor’s gross payment.
A tiling subcontractor, who isn’t VAT-registered, agrees to tile a wall and to supply the necessary materials for a total payment of £535. The materials cost the subcontractor a total of £235 (£200 + £35 for VAT). The subcontractor is also paid accommodation costs of £50 and fuel of £10.
Labour charge £300
Materials £235
Accommodation and fuel £60
Amount due (invoice amount) £595
Calculation of deduction
Total payment £595
Less cost of materials (inclusive of VAT) £235
Amount liable to deduction £360
Amount deducted at 20% £72
Net payment to subcontractor £523
The contractor deducts the cost of materials from the price for the whole job and calculates the deduction on the difference of £360. The contractor has to pay £72 to our accounts office and pays £523 (£595 – £72) to the subcontractor.
Entries on the contractor’s monthly return
In example D2, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £595
Direct cost of materials used £235
Amount deducted £72
Example D3
The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor is registered for VAT, any VAT they had to pay on materials should be excluded from the cost of materials when calculating the CIS deduction.
For the total cost of £600, a subcontractor who is a taxable person for VAT purposes, agrees to paint the interior of a building and to supply the materials. The painter pays £235 for the materials, which includes VAT of £35.
Labour charge £400
Materials £200
Total payment £600
Add VAT £105
Amount due (invoice amount) £705
Calculation of deduction
Total payment (exclusive of VAT) £600
Less cost of materials (exclusive of VAT) £200
Amount liable to deduction £400
Amount deducted at 20% £80
Net payment to subcontractor £625
The subcontractor is paid £625, which is the invoice amount (£705) less the deduction (£80).
Entries on the contractor’s monthly return
In example D3, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £600
Direct cost of materials used £200
Amount deducted £80
Deductions at the higher rate
Examples D4 to D6 show deductions at the higher rate of 30%. This rate is used for illustration purposes and may or may not be the rate in force at the time of reading this guide.
Example D4
Where no materials are supplied (‘labour-only’)
A labour-only subcontractor does work on site for £200
Total payment £200
Amount deducted at 30% £60
Net payment to subcontractor £140
The contractor calculates the deduction (£60), which has to be paid to our accounts office. The labour-only subcontractor receives the balance of £140.
Entries on the contractor’s monthly return
In example D4, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £200
Direct cost of materials used £0
Amount deducted £60
Example D5
The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor isn’t registered for VAT, any VAT they had to pay on materials should be included in the cost of materials when calculating the CIS deduction.
A tiling subcontractor, who isn’t VAT registered, agrees to tile a wall and to supply the necessary materials for a total payment of £535. The materials cost the subcontractor a total of £235 (£200 + £35 for VAT).
Labour charge £300
Materials £235
Amount due (invoice amount) £535
Calculation of deduction
Total payment £535
Less cost of materials (inclusive of VAT) £235
Amount liable to deduction £300
Amount deducted at 30% £90
Net payment to subcontractor £445
The contractor deducts the cost of materials from the price for the whole job and calculates the deduction on the difference of £300. The contractor has to pay £90 to our accounts office and pays £445 (£535 – £90) to the subcontractor.
Entries on the contractor’s monthly return
In example D5, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £535
Direct cost of materials used £235
Amount deducted £90
Example D6
The following is an example of a calculation where materials as well as labour are supplied (‘supply and fix’). Where the subcontractor is registered for VAT, any VAT they had to pay on materials should be excluded in the cost of materials when calculating the CIS deduction.
For the total cost of £600 a subcontractor, who is a taxable person for VAT purposes, agrees to paint the interior of a building and to supply the materials. The painter pays £235 for the materials, which includes VAT of £35.
Labour charge £400
Materials £200
Total payment £600
Add VAT £105
Amount due (invoice amount) £705
Calculation of deduction
Total payment (exclusive of VAT) £600
Less cost of materials (exclusive of VAT) £200
Amount liable to deduction £400
Amount deducted at 30% £120
Net payment to subcontractor £585
The subcontractor is paid £585, which is the invoice amount (£705) less the deduction (£120).
Entries on the contractor’s monthly return
In example D6, the contractor should enter the following amounts in the appropriate boxes on the contractor’s monthly return:
Total payment £600
Direct cost of materials used £200
Amount deducted £120
