The labour-only deduction base is the rule that CIS deductions are calculated only on the part of a subcontractor's payment that represents labour and construction services, never on the cost of materials that the subcontractor has bought for the job.
This is one of the most commonly misunderstood points in CIS. A subcontractor whose invoice totals £2,000 does not simply have 20% (or 30%) applied to the whole figure. The invoice must be split. If £1,200 is labour and £800 is materials, the deduction applies to the £1,200 only. At 20%, the contractor deducts £240, pays the subcontractor £1,760 and sends £240 to HMRC.
The materials element is excluded because the subcontractor has already paid for those materials themselves, usually with their own VAT registered supplier or builder's merchant. Applying a CIS deduction to materials would effectively tax a pass-through cost, which the legislation specifically prevents.
For the exclusion to apply, the materials must genuinely have been purchased by the subcontractor for the specific job. Materials that are instead provided by the contractor, or that the subcontractor is merely delivering as a supplier rather than incorporating into the works, do not qualify for the exclusion.
In practice, subcontractors should always present a clearly split invoice showing labour and materials separately. An invoice that does not split the figures gives the contractor grounds to treat the entire amount as labour and deduct accordingly. The same labour-only logic underpins the Gross Payment Status turnover test: the £30,000 net turnover threshold for a sole trader is measured after excluding materials, mirroring the deduction base.
- Always split your invoice into labour and materials with a clear description.
- Keep purchase receipts for materials so you can evidence the materials figure if challenged.
See CIS invoice splitting: how to correctly separate labour and materials for a full guide, and use the CIS invoice splitter calculator to check your own figures.