How to Calculate CIS Deductions and Check Your Payment?
Your invoice, CIS statement and bank receipt show different parts of the same payment. To check the deduction, you need to connect them: establish the amount before tax was withheld, identify the permitted exclusions and apply the correct rate.
What Should You Check Before Calculating a CIS Deduction?
Start With the Payment Before Deductions
Under the Construction Industry Scheme (CIS), the calculation is:
CIS deduction = (payment excluding any VAT charged minus permitted CIS exclusions) × applicable rate.
Use the amount being paid before CIS is deducted, rather than the money arriving in your account. The amount left after removing VAT and permitted costs is the deduction base.
Record income before CIS, the deduction itself and the net receipt separately. Using only the bank receipt as income leaves out the amount withheld.
Keeping those figures clear also helps with digital reporting under MTD for Cis Subcontractors where the rules apply.
Apply the Verified Rate
HMRC’s verification process tells the contractor whether to deduct tax and which rate to use. The standard treatments are 20% for registered subcontractors, 30% for unregistered subcontractors and no deduction for subcontractors with gross payment status.
Ask the contractor to check an unexpected rate against the verification result and the details used, instead of assuming an earlier invoice is correct.
Gross payment status allows payment without CIS withholding; tax on the business income still needs to be accounted for.
Suppose a non-VAT-registered subcontractor charges £1,800 for labour and £420 for eligible materials supplied at their actual cost. The payment before deductions is £2,220. The verified rate is 20%, with no other deductions.
Subtract the £420 materials cost from £2,220, leaving a deduction base of £1,800. The CIS deduction is £1,800 × 20% = £360.
The expected bank receipt is £2,220 minus £360 = £1,860. The contractor still pays for the materials; their eligible cost is excluded only from the deduction base.
On a labour-only payment, there is no materials cost to subtract.
Check Materials Costs and VAT Treatment
Use what you directly spent on eligible materials, rather than automatically taking the full amount labelled “materials” on your invoice. Any markup remains within the deduction base because it represents a margin, not materials expenditure.
Supplier receipts establish the cost. Where evidence is missing, the contractor must estimate it under HMRC’s calculation guidance. A clear invoice breakdown backed by receipts gives them a firmer basis for the calculation.
A non-VAT-registered subcontractor’s materials cost includes VAT paid to the supplier. For VAT-registered subcontractors, materials costs used in the calculation normally exclude VAT. VAT charged on the invoice is also excluded from the deduction base.
HMRC permits exclusions beyond materials, including specified consumables, plant hire and other costs. Check the relevant category in its guidance before treating a remaining charge as labour.
Keep this separate from calculating taxable profit. Ordinary overheads, such as a phone bill or business insurance, can be allowable business expenses without qualifying as exclusions from the CIS deduction base.
Match the Calculation to Your Statement
Put the contractor’s payment and deduction statement alongside your invoice, materials evidence and bank transaction. First, establish which payments they cover. A statement can combine several payments, while a bank receipt might settle only part of an invoice.
Compare the amount before deductions, the materials figure and the tax withheld. In the example above, a £444 deduction would equal 20% of the full £2,220.
That points to the £420 materials cost being included in the deduction base, so ask the contractor to explain the calculation.
If the deduction is correct but the bank receipt still differs, look for other payment adjustments or an outstanding balance.
Send queries with the relevant figures and evidence attached. Ask the contractor to review the rate, exclusions and payment breakdown, and request an updated statement if they correct the deduction.
A specific calculation is easier to investigate than a general query about being underpaid.
Treat Deductions as Advance Tax Payments
For sole traders, CIS deductions are advance payments towards income tax and National Insurance. The final liability depends on the wider tax position, including taxable profit and relevant allowances, rather than a flat percentage of profit.
Once the deductions are credited, there could be further tax to pay or a repayment due.
Check payments while the invoice and supporting costs are easy to identify. You can then resolve differences with the contractor using the figures behind the payment, before an unexplained gap becomes harder to trace.
