You do not deduct from the invoice
The deduction is not a percentage of what the subcontractor billed. You strip out the costs HMRC lists, then apply the rate to whatever is left. In conversation that remainder gets called "the labour element", which is close enough to be useful and just wrong enough to hide the two things below.
HMRC's list, in their words, is what comes off first:
- VAT
- materials, only if they paid for them directly
- equipment which is now unusable, consumable stores
- equipment hired for this job, plant hire
- fuel used, except for travelling
- manufacturing or prefabricating materials
Anything not on that list stays in. Which sounds obvious until you notice what is missing from it.
Travel is not on the list
Not the mileage, not the fuel to get there, not the subsistence. Every one of those stays in the amount you deduct from, so a subcontractor recharging £400 of travel loses £80 of it at the standard rate, and £120 if they are unregistered.
People assume expenses pass through clean, because in most of commercial life they do. Here they do not, and it is the line most often argued about after payment rather than before it. Worth agreeing in advance whether travel is inside the rate or recharged, because the answer changes what the subcontractor receives.
Fuel is on the list, but only some fuel
"Fuel used, except for travelling" is doing a lot of work in six words. Diesel burnt in the excavator is an exclusion and comes off before the deduction. Diesel burnt driving to site is travel, and travel is not an exclusion.
Same invoice, same fuel card, two different treatments. If a subcontractor puts one line on saying "fuel", somebody has to decide which sort it is, and the honest answer is usually "some of each". Splitting it on the invoice takes ten seconds and removes the argument.
Hired plant comes off. Owned plant does not.
The exclusion is specifically "equipment hired for this job". If the subcontractor hired a dumper and passed the hire cost on, that cost comes off before the deduction. If they own the dumper, there is no hire cost to exclude, so the charge for it sits inside the amount you deduct from.
Two subcontractors, the same machine, the same day's work, and different tax. The one who owns their kit is deducted from the charge for it and the one who hired it is not. That is not a loophole and it is not something to arrange around. Expect somebody to query their statement over it: it looks like an error and is not.
VAT and the reverse charge
VAT never forms part of the amount the deduction is worked out on. Under the domestic reverse charge there is no VAT on the invoice at all, the customer accounts for it, and the deduction is exactly the same as it would have been. The two schemes sit alongside each other rather than interacting. They arrived together and are often assumed to be one thing.
It does not verify anybody, and verification is the point
It does not verify anybody. A subcontractor's status is what HMRC returns when you verify them, not what they tell you and not what it was last year. Nor does it decide whether a materials figure is genuine: HMRC lets you ask for evidence of what they paid, and to estimate where none is available, and an inflated materials line is worth questioning before you pay it.
Common questions
How do you calculate a CIS deduction?
Take the exclusions off the net invoice first, then apply the rate to what is left. The exclusions are VAT, materials the subcontractor paid for directly, consumable stores, plant hired for the job, fuel used other than for travelling, and manufacturing or prefabrication. On a £2,800 invoice with £800 of materials you deduct 20% of £2,000, so £400, not 20% of £2,800.
What are the CIS deduction rates?
20% for a registered subcontractor, 30% for one who is not registered or whose verification failed, and 0% for gross payment status. The 30% is not a penalty you can choose to waive, it is what verification returned.
Is CIS deducted from travel and mileage?
Yes. Travel, mileage and subsistence are not on HMRC's exclusion list, so they stay in the amount you deduct from. A subcontractor recharging £400 of travel at the 20% rate loses £80 of it. Expenses do not pass through clean.
Is fuel excluded from CIS?
Some of it. HMRC excludes "fuel used, except for travelling". Diesel burnt in a machine on site comes off before the deduction. Diesel burnt getting to site does not, because that is travel. Same invoice, same fuel, two different answers, which is why it is worth splitting on the invoice.
Is plant hire excluded from CIS?
Only if it was hired. The exclusion is "equipment hired for this job", so a hire cost the subcontractor paid comes off. Plant they own does not, because there is no hire cost, so the charge for it sits inside the amount you deduct from. Two subcontractors with the same digger, one hired and one owned, pay different tax on the same job.
Is CIS deducted from VAT?
No. VAT is excluded, and under the domestic reverse charge there is no VAT on the invoice anyway. Either way the deduction is worked out on the net figure, so the VAT position never changes the deduction.
What if the subcontractor cannot evidence their materials?
HMRC lets you ask for evidence of what they paid, and says to make an estimate where it is not available. The figure is meant to be their direct cost, so an inflated materials line is worth questioning before you pay it rather than after.