What a CIS invoice must show, with a worked example
A CIS invoice is a normal subcontractor invoice that separates labour from materials, so the contractor can work out the deduction from the labour alone. If the job is within the VAT domestic reverse charge, it must also say so and must not add VAT to the amount payable.
Is CIS deducted from the VAT on an invoice?
No. HMRC tells contractors to start from the invoice total and take away the VAT, plus materials the subcontractor paid for directly, before applying the 20%, 30% or 0% rate. The deduction is worked out on what is left.
What a CIS invoice is
There is no special CIS document. It is the invoice a subcontractor sends a contractor for construction work reported under the Construction Industry Scheme. What makes it a "CIS invoice" is what the contractor does with it: under the scheme they usually deduct 20% for registered subcontractors, 30% for unregistered ones, or 0% for subcontractors with gross payment status, and pay the deduction to HMRC on the subcontractor's behalf. HMRC gives the contractor the right rate when they verify the subcontractor.
So the invoice has to give the contractor enough to do that sum without guessing.
What the invoice must show
HMRC's method for a deduction starts with the total (gross) amount of the invoice. The contractor then takes away VAT, and the amount the subcontractor paid directly for materials, along with consumable stores, fuel (except for travelling), plant hire for the job and prefabrication. The rate is applied to what is left.
That gives a practical checklist:
- Labour and materials on separate lines. Materials the subcontractor bought are not subject to the deduction. If they are buried in one lump sum, the contractor may deduct on the whole amount.
- VAT shown separately (or the reverse charge wording, below). VAT never forms part of the deduction base.
- Other deductible costs shown as their own lines where they apply, such as plant hire or fuel, so they can be excluded.
- Both parties' names and the job or contract reference, so the contractor can match the invoice to the verified subcontractor. HMRC's fixed requirement sits with the contractor: the payment and deduction statement must give the subcontractor's name and UTR, the gross payment, the cost of materials that reduced the deduction, and the amount deducted.
Contractors can ask for receipts as evidence of what the subcontractor paid for materials. If there is no evidence, HMRC says the contractor should estimate the cost.
A worked example
This is an illustrative job, not a template from HMRC. A VAT-registered subcontractor, verified at the 20% rate, refits a bathroom. They bought the materials themselves.
| Line | Amount |
|---|---|
| Labour | £1,500.00 |
| Materials (at cost, paid by the subcontractor) | £600.00 |
| Invoice total before VAT | £2,100.00 |
| Deduction base (£2,100 minus £600 materials) | £1,500.00 |
| CIS deduction at 20% | £300.00 |
| Net paid to subcontractor | £1,800.00 |
If normal VAT applies, the subcontractor adds £420 (20% of £2,100) to the invoice, which makes £2,520. The deduction is still £300, because VAT comes out of the base. The contractor pays £2,220.
If the subcontractor is not VAT registered, HMRC's CIS340 guide treats VAT they paid on materials differently: it counts towards the cost of materials, so it also comes out of the deduction base.
Reverse charge VAT changes the VAT line, not the deduction
For most building and construction services reported under CIS, the VAT domestic reverse charge applies, so the customer accounts for the VAT instead of the supplier. The invoice then carries a reverse charge note and no VAT in the amount payable. The wording, the conditions and the software rates are in reverse charge VAT invoices.
In the example above, the invoice would total £2,100 with no VAT added. The contractor still deducts £300 and pays £1,800, and accounts for the £420 VAT on their own VAT return.
Materials supplied as part of the labour job are part of the same supply, so they should not be split off to avoid the reverse charge.
Recording CIS bills in Xero, QuickBooks Online and FreeAgent
All three support the contractor side. What follows is limited to what each vendor's own help confirms.
Xero. In Financial settings you choose contractor, subcontractor or both and enter your UTR. Xero then adds CIS accounts, including CIS Labour Expense and CIS Materials Purchased for contractors. Put a CIS labour account on the labour line of a bill and Xero calculates the deduction, but only on lines that use a CIS labour account. The subcontractor also has to be set up as a CIS contact with a rate (gross 0%, standard 20% or higher 30%) before you can use those accounts on their bills. Xero also notes that you cannot select CIS accounts on repeating bills.
FreeAgent. After setting up CIS under Settings and marking the contact as a CIS subcontractor with the right rate, you enter the bill in full and choose the CIS categories: 096 CIS Accommodation and Meals, 097 CIS Travel, 098 CIS Labour or 099 CIS Materials. FreeAgent shows the deduction at the bottom of the bill and records it as owed to HMRC once the bill is paid. Its own example is a £400 labour bill with a 20% deduction: you pay £320 and £80 goes to HMRC. FreeAgent does not file the monthly CIS300 return, so you file it in HMRC's online service.
QuickBooks Online. QuickBooks states on its UK CIS page that it calculates CIS deductions automatically, supports unlimited contractors or subcontractors and can e-file to HMRC. Check QuickBooks help for the current steps to switch CIS on.
A CIS bill needs labour and materials on separate lines to get the right deduction. Software that reads only the invoice total leaves you to split the lines by hand, or with a split tool such as Datamolino's Bill Split; see line items versus invoice totals.
What goes wrong
- Materials not separated. The contractor may deduct on the whole total. Ask the subcontractor for a corrected invoice.
- VAT included in the deduction base. Check that the deduction equals the rate times labour (plus any non-deductible costs), not the rate times a VAT-inclusive total.
- Reverse charge wording missing. The invoice is then not a valid reverse charge invoice. Ask the subcontractor to reissue it.
- Wrong rate on the supplier record. In FreeAgent, changing the rate on a contact does not change bills already created. Create a new bill.
- Line totals that do not add up. See what to check when invoice lines do not add up.
If you receive many subcontractor invoices, Datamolino captures line items, so labour and materials arrive as separate lines when the invoice separates them. Once CIS is set up in your accounting software, the CIS labour and materials accounts or categories appear in Datamolino's coding list, and you can save that coding for the supplier so the next bill arrives coded the same way. Line-item capture is available on selected plans. The bill then exports to Xero, QuickBooks Online or FreeAgent, where the deduction is calculated.
How do I invoice with CIS deductions?
Invoice the full gross amount, with labour and materials shown separately. The contractor then applies the rate HMRC gave them and pays you the net amount. They must send you a payment and deduction statement within 14 days of the end of the tax month.
