The phrase “deduct CIS from labour” is useful shorthand, but it can hide the real work. A correct payment calculation starts with the contract payment and separates the amounts that HMRC says are taken out before the verified CIS percentage is applied. The invoice heading alone does not settle it; the underlying evidence matters.
HMRC tells contractors to start with the gross invoice amount, remove specified items such as VAT and certain direct costs, then apply the deduction percentage HMRC gave when the subcontractor was verified. This guide is a practical record-keeping explanation, not a substitute for checking the current facts and guidance for a payment.
The practical sequence
- Confirm the subcontractor's verified CIS outcome. Do not choose a rate because it was used last time.
- Start with the amount due on the subcontractor's invoice.
- Separate VAT where it is charged.
- Consider qualifying exclusions, including materials the subcontractor paid for directly, with evidence where appropriate.
- Apply the HMRC-returned percentage to the remaining amount.
- Retain the calculation and issue the required payment and deduction statement through the normal CIS process.
HMRC also lists consumable stores, fuel used other than for travel, job-specific hired plant, and manufacturing/prefabricating materials among items removed before the deduction calculation. Whether an item belongs in a particular category depends on the facts and evidence; do not relabel general costs simply to reduce a deduction.
A labelled illustration only
Assume an invoice has £600 of work before VAT, including £200 of materials paid directly by the subcontractor, with £120 VAT shown separately. If HMRC's verified rate is 20%, the illustrative deduction base is £400 (£600 less £200); the illustrative deduction is £80. The payment due on a £720 invoice would be £640 after that deduction.
This mirrors a published HMRC-style example structure. It does not prove that a reader's materials, VAT position, rate or invoice must be treated in the same way.
Evidence questions before payment
- Is the subcontractor the party actually being paid and already verified?
- Is VAT genuinely charged and separately identified?
- Did the subcontractor directly pay for the materials or claimed costs?
- Is the evidence sufficiently clear to support the record?
- Does the calculation use the rate returned by HMRC, rather than an assumed standard rate?
- Is the payment statement and monthly return process ready to reflect what was actually paid?
Common errors
- Deducting from a total that still includes VAT.
- Treating all invoice “materials” labels as automatically allowable without checking the direct-cost evidence.
- Using an old rate or treating CIS registration as a status determination.
- Mixing a commercial dispute about price with the mechanical CIS deduction calculation.
- Omitting the payment/deduction record from the normal monthly process.
Related FoxSums resources
- CIS for Construction and Trades: Contractor and Subcontractor Guide
- Monthly CIS Contractor Checklist
- CIS Verification: A Practical Guide for Contractors
- CIS Deduction Calculator for Contractors
Next step
Keep evidence for the amount paid, VAT and eligible materials before a deduction is calculated.
Important
General information only. Check the facts and current official guidance for the business’s circumstances.
Sources and review
- Evidence check date: 2 November 2026. This is a specialist construction and trades resource; it is not presented as general small-business compliance guidance.
- GOV.UK - CIS contractor deductions and payment statements
- GOV.UK - CIS monthly returns
- GOV.UK - CIS340