The Construction Industry Scheme is the biggest source of invoicing errors in UK construction. The rules are not complicated, but the arithmetic trips people up because CIS, VAT and the domestic reverse charge all interact on the same invoice.
Who CIS applies to
If you pay subcontractors for construction work, you are a contractor under CIS and must register, verify subcontractors with HMRC, deduct at the right rate and file monthly returns. If you are paid by a contractor for construction work, you are a subcontractor and will have deductions taken from your labour.
The three rates
- 20% — registered subcontractor. The standard case.
- 30% — unverified or unregistered subcontractor.
- 0% — gross payment status, for larger subcontractors who meet HMRC's turnover and compliance tests.
What the deduction applies to
CIS is deducted from the labour element only. It is not deducted from:
- Materials the subcontractor genuinely purchased for the job
- Plant hire paid to a third party
- Fuel (other than for travel)
- VAT
Materials must be shown separately on the invoice, and must be at cost — you cannot inflate the materials line to reduce the deduction.
Worked example 1: standard 20% deduction
| Labour | £2,000.00 |
| Materials | £800.00 |
| Subtotal | £2,800.00 |
| VAT at 20% | £560.00 |
| Invoice total | £3,360.00 |
| CIS deduction (20% of £2,000 labour) | −£400.00 |
| Net payment to subcontractor | £2,960.00 |
The £400 goes to HMRC and counts against the subcontractor's tax bill.
Worked example 2: 30% unverified
Same invoice, unverified subcontractor: the deduction is 30% of £2,000 = £600, so the net payment is £2,760. Verifying a subcontractor takes minutes and saves them £200 on this invoice — always verify before the first payment.
Worked example 3: with the domestic reverse charge
Since March 2021, most business-to-business construction services between CIS-registered parties fall under the VAT domestic reverse charge. The subcontractor does not charge VAT; the customer accounts for it.
| Labour | £2,000.00 |
| Materials | £800.00 |
| Subtotal | £2,800.00 |
| VAT | £0.00 — reverse charge applies |
| CIS deduction (20% of labour) | −£400.00 |
| Net payment | £2,400.00 |
The invoice must carry wording such as: "Reverse charge: VAT Act 1994 Section 55A applies. Customer to account to HMRC for the reverse charge output tax on the VAT-exclusive price of items marked reverse charge." It must also state the VAT rate that would have applied, and the amount.
When the reverse charge does not apply
- The customer is an end user (for example a domestic client, or a developer selling the finished building)
- The customer is not VAT registered or not CIS registered
- The supply is zero-rated, such as new-build residential
- You are supplying staff or workers rather than construction services
End users must confirm their status in writing. Keep that confirmation — it is your defence if HMRC queries the VAT treatment.
Monthly returns and deadlines
CIS returns are due by the 19th of each month for the tax month ending on the 5th. A nil return is still required if you made no payments. Late filing penalties start at £100 and escalate quickly.
Getting the arithmetic right automatically
SiteClick separates labour and materials on every invoice, applies the correct CIS rate for each subcontractor, handles reverse charge wording, and keeps the monthly figures ready for your return — so the numbers on the invoice add up without a spreadsheet.