How to invoice under CIS without losing money on the deduction

If a contractor pays you for construction work, they take tax off your invoice before you see it. That is the Construction Industry Scheme, and the only real question is whether the deduction is worked out on the right figure. Get the invoice right and it is. Lump everything together and you hand HMRC tax on your bricks.

What CIS actually is

Under CIS the contractor deducts money from your payment and passes it to HMRC on your behalf. It is an advance on your income tax and National Insurance, not an extra tax. At the end of the year it comes off your bill, or comes back as a refund if you have paid too much.

The rate depends on whether HMRC knows who you are:

• 20% if you are registered with HMRC as a CIS subcontractor.
• 30% if you are not registered. Register; it is free and the difference on a £1,350 labour bill is £135 sitting with HMRC until next April.
• 0% if you have gross payment status, which HMRC grants to businesses with a clean record and enough turnover. You get paid in full and settle up yourself.

The contractor checks your status with HMRC before the first payment. That is called verification, and it is their job, not yours, but it goes faster if your name, UTR and National Insurance number on the invoice match what HMRC holds.

The deduction is on labour, not the whole invoice

This is the part that costs subcontractors money. CIS is deducted from the labour element only. It is not deducted from:

• materials you bought for the job, at what they actually cost you;
• plant hire, if you hired the plant yourself;
• fuel for that plant (not fuel for getting to site);
• VAT, where it is charged.

So an invoice that says “£2,200, garden wall” invites the contractor to deduct on the lot, because they cannot see what the materials were. An invoice that says labour £1,350, materials £850, gets the deduction on £1,350.

Here is the same job both ways, registered at 20%, no VAT:

The £170 comes back eventually through your tax return. Eventually is the problem when it is the end of the month.

One rule to keep you honest: the materials figure is what you paid, not what you charged. If you mark materials up, the mark-up is labour as far as CIS is concerned. Keep the merchant receipts; the contractor can ask for them.

What goes on a CIS invoice

Everything a normal invoice carries, plus the things the contractor’s office needs to make the deduction and file it:

1. Your business name, address and UTR. A limited company adds its company number. The contractor files your deduction against your UTR, so if it is wrong the money goes into a hole.
2. A unique invoice number and the date.
3. The contractor’s name and the site address.
4. What the work was, in plain words.
5. Labour and materials as separate lines, materials at cost.
6. The CIS deduction and the amount due after it, or at least the labour figure the deduction applies to. The contractor will work it out either way, but printing it stops the phone call.
7. VAT, if you are registered. See below, because under CIS it usually works differently.
8. How to pay and when it is due. Account name, sort code, account number, and a date. Contractors pay on their own cycle; a due date on the invoice is what makes a reminder fair.

VAT and the reverse charge

If you and the contractor are both VAT registered and the work is within CIS, the domestic reverse charge normally applies. You do not add VAT to the invoice. The contractor accounts for it to HMRC themselves. Your invoice still shows the VAT rate and the amount that would have applied, and carries a line saying the reverse charge applies and the customer must account for the VAT to HMRC.

It does not apply when the customer is an end user (a homeowner, or a business that is not selling the work on) or when the customer is not VAT registered. Then you charge VAT as normal. If you are not VAT registered at all, say so on the invoice and the question goes away.

The reverse charge affects your cash flow, not your tax bill. You no longer collect VAT from the contractor and hand it over later, so there is less money passing through your account. If you have been living off the VAT between quarters, notice that before it notices you.

The statement, and your tax return

Within 14 days of the end of each tax month (the 5th), the contractor must give you a payment and deduction statement showing what they paid you and what they took off. Keep every one. They are the evidence for the deductions you claim back.

Sole traders claim the deductions on the self-assessment return. Limited companies set them against their own PAYE and CIS liabilities through the monthly Employer Payment Summary, and claim any balance from HMRC at the end of the tax year. Either way, no statement means an argument with HMRC, and HMRC does not lose those.

Getting it right without typing it all

Every line above is a field on the free construction invoice template. Put labour and materials on separate lines, switch CIS on, and it prints the deduction and the amount due on the invoice, with your bank details and the due date. No sign-up, and nothing you type leaves your device.

In the TradePA app you would just say it: “Invoice Hartley Construction for the garden wall, labour thirteen-fifty, materials eight-fifty, CIS at twenty per cent.” The invoice comes back split, deducted and ready to send, and when the payment is late your PA writes the reminder. There is a plain-English entry on what CIS is in the glossary, and a guide to chasing an unpaid invoice when a contractor goes quiet.

A word on the above. This is general information for UK trades, written to be useful, not advice for your situation. Prices vary by job and by region, and tax and legal rules change. Check the current position on GOV.UK or ask your accountant or legal professional for actual advice.

The TradePA team

TradePA is the AI personal assistant for UK trades. Say the job and it writes the quote, gets the invoice ready to send and writes the reminder when money is late, for £10 a month. About TradePA.