The materials deduction rule in CIS means that the cost of materials a subcontractor buys for a job is excluded from the CIS deduction base: the contractor does not apply the 20% or 30% rate to that portion of the invoice.
Only the labour and construction-services element of a payment is subject to CIS deduction. This is often called the labour-only deduction base. Materials on the same invoice are paid to the subcontractor in full, without any withholding, because the subcontractor has already borne those costs and is simply recovering them.
A worked example:
- Invoice total: £3,000 (£1,800 labour, £1,200 materials).
- CIS deduction at 20%: £1,800 multiplied by 20% = £360.
- Contractor pays subcontractor: £2,640 (£3,000 minus £360).
- Contractor pays HMRC: £360.
- Materials (£1,200) are paid in full within the £2,640 received.
The exclusion has limits. To qualify, the materials must be:
- Purchased by the subcontractor specifically for the contract (not provided or owned by the contractor).
- Incorporated into the works (not merely delivered as a separate supply).
- Evidenced by purchase receipts the subcontractor can produce if HMRC asks.
Where an invoice does not split labour and materials clearly, the contractor is entitled to treat the whole amount as labour and deduct at the full rate. Subcontractors who want to protect their materials exclusion must present a split invoice with separate line items.
The materials exclusion also links to Gross Payment Status. The GPS turnover test measures net CIS income after excluding both VAT and materials costs: a sole trader needs at least £30,000 of net labour-only CIS turnover to qualify. Subcontractors who fail to split their invoices properly risk understating their materials exclusion and, paradoxically, overstating their net CIS turnover, which can affect the GPS compliance calculation.
See CIS invoice splitting: how to correctly separate labour and materials for detailed guidance on how to structure your invoices correctly.