CIS Invoices: The Mistake That Costs Subcontractors 20% of Their Materials

Two subcontractors invoice the same contractor £5,000 for identical jobs. One gets £4,400 paid into the bank. The other gets £4,000. Same work, same scheme, same tax status — the £400 difference is one line on the invoice. If you work under CIS and that sentence doesn't immediately make sense, this article pays for itself.

CIS in one paragraph

The Construction Industry Scheme in one paragraph: contractors must deduct tax from payments to subcontractors and pass it to HMRC. The rate is 20% if you're registered and verified, 30% if you're not, and 0% if you've earned gross payment status. The deduction counts toward your tax bill — it's withholding, not extra tax — but it comes out of your cash flow now.

Deductions apply to labour, not materials

Here's the rule that costs people money: the deduction applies to labour, not materials. If your £5,000 invoice is £3,000 labour and £2,000 materials, the contractor should deduct 20% of £3,000 — £600 — and pay you £4,400. But if your invoice shows one line, '£5,000 — building works', the contractor has nothing to go on and deducts 20% of everything: £1,000. You just made HMRC an interest-free £400 loan you won't see again until your tax return, a year away.

Split labour and materials on every invoice

So the fix is structural: every CIS invoice shows labour and materials as separate lines with honest figures. Materials at cost — HMRC can and does ask for receipts if the split looks inventive, and inflating the materials line to dodge deductions is the kind of thing that turns a routine check into an investigation. Real split, clearly labelled, every time.

Get verified: 20%, not 30%

Second money-saver: get verified. Unverified subcontractors are deducted at 30% instead of 20% — a ten-point difference that exists purely because of a missing registration. If a contractor tells you they're deducting 30%, that's your cue to sort your CIS registration with HMRC and give the contractor your correct details (UTR and business info) so they can verify you at the standard rate.

CIS and the VAT reverse charge

CIS also collides with VAT in a way that catches people out: the domestic reverse charge. On most construction services between VAT-registered, CIS-registered businesses, you don't charge VAT at all — the customer accounts for it instead. Your invoice must say so, with wording like 'Reverse charge: customer to account for VAT to HMRC', and still show your VAT number and the rate that would have applied. Charging VAT when the reverse charge applies is a genuine error, not a bonus — the customer can't reclaim it properly and you'll be unwinding it later.

Keep your deduction statements

Keep every deduction statement. Contractors are required to give you one for each month they've deducted tax, and those statements are the evidence that offsets your bill at year end. Subcontractors on 20% deductions very commonly end up with refunds — but only the ones who can show the paper. A missing statement is money you paid and can't prove.

Gross payment status

And if your business has grown — roughly £30,000 of construction turnover per person, clean tax record, business bank account — look at gross payment status. Zero deductions, full invoice paid, tax handled through your return like any other business. For an established subcontractor, it's the single biggest cash-flow upgrade available, and it's a form, not a miracle.

None of this is exotic; it's line discipline. An invoicing setup that knows CIS — splits labour from materials, applies the right deduction rate, adds reverse-charge wording when it applies — takes the whole problem off your plate. However you do it, the rule stands: on a CIS invoice, the split isn't formatting. It's cash.