Why the split matters
The CIS deduction your contractor takes from your payment is not a deduction on the whole invoice. Under the Construction Industry Scheme, the deduction applies to the labour element only. Materials you personally purchase and bring to a job are excluded from the deduction base entirely. That one rule, widely misunderstood and widely ignored on invoices, is the source of most CIS over-deduction.
The three CIS deduction rates for 2026/27 are unchanged: 0% for a subcontractor with gross payment status, 20% for a registered subcontractor, and 30% for an unregistered one. All three rates apply to labour only. A contractor who applies any of those rates to the full value of an invoice, including the materials portion, is over-deducting.
The practical effect compounds quickly. A subcontractor running £60,000 of invoices over a year, made up of £40,000 labour and £20,000 materials, should have 20% taken on the £40,000 of labour, producing total deductions of £8,000. If the split is never made clear and the contractor deducts on the full £60,000, the deduction is £12,000. That is £4,000 over-deducted in a single year, money that sits with HMRC rather than in the subcontractor's business until it is recovered through the Self Assessment return. (This is the same scenario worked through in full later in the guide.)
The fix is a correctly structured invoice, presented every time, without exception. Everything else in CIS invoice management follows from that.
What counts as materials
Materials that qualify for exclusion from the CIS deduction base are the physical goods the subcontractor personally purchases and incorporates into the construction work: plaster, plasterboard, timber, concrete, bricks, fixings, tiles, insulation and so on. The statutory basis for this exclusion is FA 2004 s.61, which limits the deduction to so much of the payment as is not shown to represent the direct cost of materials. The key tests are that the subcontractor bought them (not the main contractor) and that they are incorporated into the build (not equipment the subcontractor takes away again at the end).
A few categories cause regular confusion:
- Materials bought by the main contractor and given to the subcontractor. These are not the subcontractor's materials. They should not appear as a materials line on the subcontractor's invoice at all, because the subcontractor has incurred no cost for them.
- Plant hire and equipment the subcontractor brings. The treatment depends on whether the plant is hired or owned. Under HMRC CIS 340 guidance, s.3.14, plant hired from a third party (and consumables such as fuel) may be treated as materials and excluded from the deduction base. A scaffolding subcontractor who hires scaffolding from a hire company can therefore exclude that cost. A scaffolder who owns their own scaffolding cannot exclude the scaffolding cost as "materials" (though fuel costs remain excludable).
- Accommodation, travel and subsistence. These are the subcontractor's own overheads and do not appear as a materials line on a CIS invoice.
If you are in any doubt about a specific item, the working rule is: if it stays in or on the building when the job is done and you paid for it, it is a material. If it goes back in your van, it is not.
What counts as labour
The labour element is the subcontractor's own time and skill, the time of any employees the subcontractor brings to the job, and the cost of any sub-subcontractors the subcontractor engages. Under FA 2004 s.61, the only item excluded from the deduction base is the direct cost of materials. Sub-subcontractor costs are a labour cost on the invoice, not a material, and they remain in the deduction base regardless of whether the sub-subcontractor holds gross payment status. GPS status of a sub-subcontractor determines whether the engaging party must deduct CIS when paying the sub-sub; it has no effect on what the main contractor deducts from the subcontractor's own invoice. This is the component the deduction rate is applied to.
A useful way to draw the line: if it leaves the site with you, or if it is a person's time, it is labour. If it stays in the building and you paid for it, it is a material.
The item-by-item breakdown
The table below sets out how common line items are treated for CIS deduction purposes. Use it as a reference when structuring invoices.
| Item type | CIS deduction applies? | Notes |
|---|---|---|
| Your own labour (time and skill) | Yes, included in deduction base | Core CIS service; deduction applies at 20% or 30% |
| Your employees' labour | Yes, included in deduction base | Labour you bring to the job regardless of how it is employed |
| Materials you personally purchase | No, excluded from deduction base | Must be bought by the subcontractor and incorporated into the works |
| Plant hired from a third party | No, excluded from deduction base as materials | HMRC CIS 340 guidance, s.3.14: hire cost and consumables (e.g. fuel) may be treated as materials |
| Plant the subcontractor owns | Yes, included in deduction base | No notional hire deduction for owned plant; fuel costs remain excludable |
| Sub-subcontractor payments | Yes, included in deduction base | Labour cost on the invoice; GPS status of the sub-subcontractor has no effect on what the main contractor deducts from your invoice (FA 2004 s.61: only materials are excluded) |
| VAT | No, excluded in all cases | VAT is never part of the CIS deduction base, whether charged normally or under the domestic reverse charge |
How to structure the invoice
A CIS invoice needs to make the split visible so the contractor can apply the correct deduction without guessing. Show labour and materials as separate line items on the face of the invoice. A clear format looks like this:
- Labour (plastering works, 3 days): £700.00
- Materials (plaster, bonding coat, plasterboard): £1,300.00
- Net total: £2,000.00
- VAT (if applicable, or note if DRC applies): to be accounted for by customer
- CIS deduction (20% of labour only, £700): £140.00
- Amount due: £1,860.00
Every CIS invoice must also include your Unique Taxpayer Reference (UTR). The contractor needs it to verify your status and file the monthly CIS300 return correctly. A missing UTR is one of the most common reasons a contractor defaults to the 30% unregistered rate, even for a subcontractor who is registered and entitled to the 20% rate.
You can use our CIS invoice splitter calculator to work out the correct deduction before you send, which also double-checks the split across labour and materials.
Worked example 1: a single job
A self-employed plasterer completes a job and invoices £2,000. The breakdown is £700 for labour and £1,300 for materials (plaster and plasterboard) that the plasterer personally bought and supplied. The plasterer is a registered subcontractor, so the applicable rate is 20%.
- Correct deduction: 20% of £700 labour = £140
- Incorrect deduction (full invoice): 20% of £2,000 = £400
- Over-deduction on this job: £260
The plasterer receives £1,860 rather than £1,600, a difference of £260 on a single job. That £260 is not lost permanently but it sits with HMRC until the plasterer claims it back through the Self Assessment return, which can be anything from a few months to well over a year away. Meanwhile the plasterer has to fund the gap out of working capital.
Worked example 2: a full year
The same plasterer runs a full year of work totalling £60,000 in invoices. Of that, £40,000 relates to labour and £20,000 to materials personally purchased.
| Scenario | Deduction base | Total CIS deducted (20%) |
|---|---|---|
| Correct split (labour only) | £40,000 | £8,000 |
| No split (full invoice amount) | £60,000 | £12,000 |
| Annual over-deduction | £20,000 excess base | £4,000 over-deducted |
The plasterer on the 20% rate who never splits their invoices correctly is handing HMRC an extra £4,000 a year as an interest-free advance. That money comes back eventually through Self Assessment, but the timing gap is real and it costs. Over five years on the same pattern the cumulative over-deduction position runs to £20,000 of cash that has been sitting with HMRC instead of in the business.
A correctly structured invoice, sent on every job, eliminates this entirely. The fix takes a few minutes per invoice and costs nothing beyond the effort of setting up a template.
The domestic reverse charge and the CIS split
If both you and your contractor are VAT-registered and CIS-registered, and the contractor is not the end user of the construction services, the VAT domestic reverse charge (DRC) most likely applies. Under the DRC, you do not add VAT to the invoice in the normal way. Instead the contractor accounts for the output VAT directly to HMRC, and you note on the invoice that the reverse charge applies.
For the CIS deduction calculation the DRC changes nothing. VAT is excluded from the CIS deduction base regardless, so the rule stays the same: apply the deduction rate to labour only. The invoice wording changes to reflect the reverse charge, but the labour-materials split and the deduction arithmetic are unaffected. For a fuller explanation of when the DRC applies and how to handle it, see our guide to the VAT domestic reverse charge for construction.
What to do if your contractor over-deducts
If a contractor applies the CIS deduction to the full invoice rather than the labour element, raise it directly. The steps are:
- Gather the evidence. Pull together the supplier invoices, receipts or delivery notes that confirm what you paid for the materials. The more specific these are to the job in question, the cleaner the correction.
- Contact the contractor. Ask them to revise the deduction statement to apply the rate to labour only, using the materials evidence to support the corrected split.
- If the CIS300 return has already been filed. The contractor can submit a correction to HMRC. If this has already been paid over, the excess is recoverable either by the contractor amending the return or by you claiming it back through your Self Assessment return at the year end.
- Document the correction. Keep a copy of the revised deduction statement alongside the original, in case the figure comes up during a HMRC check.
Prevention is simpler than correction. A clearly split invoice, presented at the point of invoicing, reduces the chance of an over-deduction arising in the first place. Once a contractor's accounting software has the correct split on file it usually sticks.
If you have been consistently over-deducted over multiple years, the excess is recoverable through Self Assessment for up to four prior tax years, so the position is not necessarily lost. The route to recovering it, and calculating the correct figures for each year, is covered in our guide to CIS tax refunds.
Registration and the rate that applies
Getting the split right is one part of the equation. The other is making sure the correct rate applies to the labour portion in the first place. A registered subcontractor suffers the 20% rate. An unregistered subcontractor suffers 30%. The 10-point difference on every payment is the reason registration is practically essential for anyone working in construction, even if GPS is not yet in reach. Our guide to CIS deduction rates covers the three-tier structure and what each rate means in practice.
For an established subcontractor whose labour income clears the net turnover threshold and whose compliance record is clean, the next step up from the 20% rate is gross payment status at 0%, which removes the deduction on the labour element entirely. At that point the split is still worth maintaining clearly on invoices (for transparency and for the contractor's CIS300 return) but the deduction itself falls away.
Putting it into practice
The labour-materials split is not an advanced CIS concept. It is the foundational rule of how the deduction works, and it belongs on every invoice, every time. A subcontractor who consistently sends clear, split invoices protects themselves from over-deduction, makes the contractor's compliance straightforward, and builds a clean audit trail in case any payment is ever queried.
The tools to help are already available. Use the CIS invoice splitter calculator to check the figures before you send. If you want help reviewing your current invoicing practice, working out how much has been over-deducted in prior years, or recovering that through Self Assessment, our team works with CIS subcontractors on exactly this every day.