Pay another self-employed trade for construction work and you can become a CIS contractor on that first subcontract. Register before taking them on, verify them before paying, and deduct from the right amount, which excludes their direct materials costs. (HMRC)
A materials line protects cash, but invoice formatting does not determine the tax: “works as agreed” on one line does not entitle the contractor to deduct from everything.
One subcontract can create monthly obligations
A builder paying a self-employed plasterer for a fortnight can be a mainstream contractor, with no minimum turnover before it applies. Establish first that the person really is self-employed: CIS registration does not settle employment status or replace PAYE. (HMRC contractor overview)
Building, refurbishment, decorating and site preparation are within scope; architecture, surveying, carpet fitting and scaffolding hire without labour are not. Check mixed contracts rather than assuming one exempt task exempts the whole agreement. A business outside construction can still be caught as a deemed contractor once its construction spending exceeds £3 million in the previous rolling 12 months. (HMRC scope guide)
One £3,000 invoice, four cash outcomes
Take an illustrative subcontractor who is not VAT-registered. The agreed job price is £3,000, comprising £1,800 for work and £1,200 of materials bought directly for this job. The materials figure includes any irrecoverable VAT and contains no resale markup.
| Calculation | Amount exposed to CIS | Deduction | Cash received |
|---|---|---|---|
| Incorrectly deduct 20% from everything | £3,000 | £600 | £2,400 |
| Correct materials exclusion, standard 20% | £1,800 | £360 | £2,640 |
| Correct materials exclusion, higher 30% | £1,800 | £540 | £2,460 |
| HMRC confirms gross payment status | £0 | £0 | £3,000 |
These are advance tax deductions, not a cut in the agreed price. (HMRC)
Showing the £1,200 materials purchase protects £240 of immediate cash against the incorrect first row: after paying the merchant, £1,440 is left rather than £1,200. That still has to cover other job costs and tax.
But the first row is an error to challenge, not the lawful default for a vague invoice. HMRC’s payment guidance says the contractor can seek evidence and should estimate materials costs if evidence is unavailable. The contractor must check the amount and retain records. An itemised invoice backed by merchant receipts makes this easier. (HMRC deduction instructions)
Agree the materials figure before payment, send the receipts with the invoice, then reconcile the deduction statement when it arrives and query it promptly if it is wrong. (HMRC payment records)
A materials markup still attracts the deduction
Suppose instead the £3,000 price includes materials charged at £1,400, which cost the subcontractor £1,200. The deduction base remains £1,800, not £1,600. The £200 markup is not excluded simply because it appears under “materials”. The correct 20% deduction remains £360.
Exclude VAT charged by a VAT-registered subcontractor first. Consumable stores, hired plant and operating fuel also qualify; travel fuel and subsistence do not. Owned equipment earns no notional plant-hire exclusion, though the fuel it burns can. (HMRC CIS 340, sections 3.11 to 3.14)
Use the full £3,000 sale and actual costs in your job profitability calculation. Track CIS withheld separately as a tax credit so it does not distort your pricing margin.
Verification changes cash, not the price
Verify a new subcontractor through HMRC’s free CIS service before paying them, and reverify anyone you have not included on a return in the current or previous two tax years. Matching their registered details matters. (HMRC verification guide)
On our invoice, the difference between 20% and 30% is £180. Do not skip verification and choose a rate yourself. Incorrect or unmatched details can prevent confirmation of registration; paying without making the required deduction can leave the contractor funding it.
Gross payment status removes the deduction entirely, but it is a separate application with business, turnover and compliance tests. The turnover test excludes VAT and materials: £30,000 for a sole trader, and generally £30,000 per partner or director or £100,000 for the partnership or company. VAT compliance now forms part of it, though minor failures and reasonable excuses are recognised, so one late return does not automatically cost you the status. (HMRC gross-payment guide, reform guidance)
March does not mean waiting until the following January
For a sole trader, CIS deductions are credited through Self Assessment after the tax year ends. A payment on 20 March 2027 belongs to the year ending 5 April 2027, which closes 16 days later, so the return can be prepared then rather than waiting until January 2028. Only the excess over your liability comes back, and processing takes time. (HMRC)
A limited company offsets monthly through its Employer Payment Summary instead: £360 suffered against a £500 payroll bill leaves £140 to pay, and against a £100 bill, £260 carries forward inside the same tax year. Anything unabsorbed at year end needs a claim. (HMRC)
Adjust your tax set-aside for recorded CIS credits, using the expected total tax bill rather than assuming 20% settles everything.
Put the 19th in the diary even in quiet months
Report each tax month, running 6th to 5th, by the following 19th. A month with no subcontractor payments still needs dealing with: file a nil return or notify inactivity rather than skipping it. (HMRC)
The ordinary late-return ladder adds £100 at one day, £200 at two months, then the higher of £300 or 5% of deductions at six months and again at 12 months. A £360-deduction return left outstanding reaches £900 across those stages.
Work the “higher of” test and you see why it bites hardest on the smallest firms. 5% of £360 is £18, so the £300 floor applies, not the percentage. The two only cross at £6,000 of deductions in the month, which on a 20% rate means about £30,000 of labour paid to subcontractors. Below that, the penalty is a flat £300 a stage regardless of how small the return is, so a forgotten nil month and a busy month cost exactly the same. Deliberate withholding can attract higher penalties. (HMRC monthly returns)
Deduction statements go out by the 19th too. Paying HMRC is separate, normally the 22nd. (HMRC payment guide)
Do these three things before the next invoice
One check comes before you invoice at all. Where both businesses are VAT-registered and the payment is CIS-reportable, the customer usually accounts for the VAT under the domestic reverse charge, so you do not collect it. Exceptions apply, and CIS still needs its own calculation. (HMRC technical guide)
Then, on the CIS itself, three things:
- Split labour and materials as separate lines on every invoice, and keep the merchant receipts with it. On the example above that is £240 of cash.
- Get verified before the first payment, not after. That is the £180.
- Put the 19th in the diary for every month, including the quiet ones. The £300 floor does not care how small the return was.
