One of the most persistent sources of confusion in the Construction Industry Scheme is a straightforward question: which line items on a subcontractor's invoice actually attract CIS deduction, and which do not?

Get it wrong as a contractor and you risk either over-deducting (creating a dispute with your subcontractor) or under-deducting (leaving yourself personally liable to HMRC for the shortfall). Get it wrong as a subcontractor and you may be receiving less take-home pay than you are entitled to — or, worse, facing a compliance challenge.

This guide works through every common invoice component — labour, materials, plant hire, fuel, travel, subsistence, accommodation and VAT — and sets out precisely how HMRC's rules apply to each, supported by worked examples and references to the relevant HMRC manual guidance. For a companion guide on what expenses subcontractors can personally deduct on their tax return, see our article on what expenses CIS subcontractors can claim.

How CIS Deduction Works: The Core Formula

Before examining each invoice component, it helps to understand the fundamental formula HMRC uses. Under the Construction Industry Scheme, the contractor does not simply deduct CIS from the total invoice amount. The calculation follows a two-step process:

1. Step 1 — Establish the gross amount. Start with the total payment due, then remove any VAT charged by the subcontractor (where they are VAT-registered). This gives the VAT-exclusive gross payment.
2. Step 2 — Remove qualifying materials. From that VAT-exclusive gross, deduct the amount the subcontractor actually paid for direct materials used in the construction work (including certain plant hire and fuel for plant). The remaining figure is the CIS base — the amount on which the deduction rate is applied.

The CIS deduction rate is then applied to the CIS base. For 2025/26 the three rates are:

Invoice Components: CIS Deduction At-a-Glance

The table below summarises how each common invoice line item is treated under the CIS rules. Full explanations with examples for each component follow.

Labour: Always Subject to CIS Deduction

Labour is the component CIS was specifically designed to tax. Any payment for work done — the cost of the subcontractor's time and skills — is always included in the CIS base without exception. There are no carve-outs, no minimum thresholds, and no registration status that exempts labour from the calculation (other than Gross Payment Status, which exempts the entire invoice).

For this reason, a clearly itemised invoice that separates labour from all other components is both a legal best practice and a practical protection for both parties. If a subcontractor presents a single, lump-sum invoice with no breakdown, the contractor must apply CIS deduction to the full amount — because nothing has been "shown to represent the direct cost of materials."

Materials: Excluded — But Only If Genuinely Purchased

The direct cost of materials used in the construction work is deducted from the gross payment before CIS is calculated. This means CIS deduction does not apply to materials — but the exclusion comes with important conditions.

HMRC's Finance Act 2004 s.61 states that the exclusion applies to "so much of the payment as is shown to represent the direct cost to any other person of materials used or to be used in carrying out the construction operations." Three key points flow from this wording:

• The materials must have been genuinely purchased. The subcontractor must have actually paid for them. A subcontractor cannot claim a materials exclusion for items provided free of charge by the main contractor.
• The cost must be the direct cost — not including mark-up or profit. If a subcontractor buys materials for £500 but invoices the contractor £700 for them, HMRC may challenge the £200 excess as not representing actual direct cost.
• The contractor must be able to verify the cost. Under Regulation 4(3)(b)(iii) SI 2005/2045, it is the contractor's responsibility to ensure material costs are not overstated. Contractors should request copies of material invoices if there is any doubt.

Plant Hire: The Critical Ownership Test

Plant hire is one of the most misunderstood areas of CIS and a common focus of HMRC compliance visits. The rule — found at CISR15090 — turns entirely on who owns the plant.

Third-party hired plant: Excluded

Where a subcontractor hires plant or machinery from a third party — a plant hire company, for example — the cost of that hire is treated as materials and excluded from the CIS deduction calculation. The logic is that this is a genuine cash cost the subcontractor has incurred, equivalent to purchasing a material.

Subcontractor-owned plant: Included

Where the subcontractor owns the plant outright and charges the contractor for its use — for example, a scaffolding company that owns its own scaffolding and includes a charge for it on the invoice — no materials exclusion is available. HMRC's CISR15090 is explicit: "If the subcontractor owns the plant employed in executing the work no 'notional' deduction for plant hire may be made." The charge is treated as part of the labour element and CIS deduction applies.

Plant hired with an operator: Included

There is an additional nuance where a contractor hires plant together with an operator who performs the work. In this scenario the contract has become a contract for construction operations (the operator is providing labour), not merely a hire arrangement. CIS applies to the full payment — the hire plus the labour element cannot be separated unless the two are contracted separately.

Fuel: Two Different Treatments Depending on Purpose

Fuel is the one component on a CIS invoice where the same item — fuel — can produce two entirely different outcomes depending on what the fuel was used for. This distinction catches out both contractors and subcontractors regularly.

Fuel used to operate plant or machinery: Excluded

Consumable items — including fuel — used to operate hired or owned plant are treated as materials for CIS purposes under CISR15090. So if a subcontractor hires an excavator and fills it with diesel, the diesel cost is excluded from the CIS base along with the hire cost.

Fuel used for travel (van, car): Included

Fuel purchased to travel to and from the site — filling up the subcontractor's van or car — is travel expenditure, not a material. HMRC CIS340 is unambiguous on this point: "Any travelling expenses (including fuel costs) and subsistence paid to or on behalf of the subcontractor must be included in the gross amount of payment and the amount from which the deduction is made." Travel fuel is part of the CIS base.

Travel, Subsistence and Accommodation: All Included in the CIS Base

This is an area where the CIS rules contradict what many subcontractors expect — and where HMRC's position is unambiguous. Even though travel, subsistence and accommodation costs are genuine business expenses for the subcontractor, they do not benefit from the same exclusion as materials. When a subcontractor recharges these costs to the contractor as part of the construction contract payment, they are included in the gross amount on which CIS deduction is calculated.

HMRC's CIS340 guide states directly: "Any travelling expenses (including fuel costs) and subsistence paid to or on behalf of the subcontractor must be included in the gross amount of payment and the amount from which the deduction is made. The deduction applies to any part of a payment that is for subsistence or travelling expenses."

This applies to:

• Travel costs — mileage, train fares, fuel for the subcontractor's vehicle getting to site
• Subsistence — meals, drinks, packed lunches recharged as part of the contract
• Accommodation — hotel costs, lodging, temporary rented accommodation recharged to the contractor

VAT: Always Excluded from the CIS Calculation

VAT is excluded from the CIS calculation where the subcontractor is registered for VAT. The contractor calculates and applies CIS on the net, VAT-exclusive amount only.

There is one nuance here: where a subcontractor is not VAT-registered, any VAT they paid on materials forms part of their direct cost and is therefore included in the materials exclusion figure (since they cannot reclaim it). The net effect is the same — VAT ultimately does not fall within the CIS deduction — but the mechanics differ slightly depending on the subcontractor's VAT status.

Worked Example 1: Non-VAT Registered Subcontractor

This example uses a typical invoice from a self-employed CIS subcontractor who is not registered for VAT. The subcontractor is registered with HMRC so the 20% rate applies.

Worked Example 2: VAT-Registered Subcontractor (Standard VAT)

This example shows the calculation where the subcontractor is VAT-registered and charges VAT at the standard 20% rate. The domestic reverse charge does not apply here (assume the end client is a homeowner, not a VAT-registered contractor).

The Four Mistakes HMRC Looks For in a CIS Compliance Review

HMRC compliance visits to construction contractors regularly focus on four specific areas within the materials and labour split. Being aware of these protects both contractors and subcontractors.

1. Materials overstated by the subcontractor

A subcontractor who inflates the materials figure reduces the CIS base and therefore the tax deducted. HMRC will ask contractors to provide evidence — copies of the subcontractor's material purchase invoices — to verify that declared material costs are accurate and not padded with profit margin or non-qualifying items. The HMRC CIS340 guide is explicit that this verification duty lies with the contractor.

2. Owned plant claimed as hired plant

Claiming a materials exclusion for scaffolding, equipment, or machinery that the subcontractor owns outright is specifically highlighted in HMRC guidance. The exclusion only applies to genuine third-party hire costs — not notional hire charges for the subcontractor's own assets.

3. Travel and accommodation excluded as materials

Some subcontractors and their advisers incorrectly treat recharged accommodation and travel as materials-equivalent and exclude them from the CIS base. HMRC's position (CISR15080) is unambiguous that these are part of the deductible gross — not excludable materials.

4. CIS applied to the VAT-inclusive total

Applying the CIS rate to the total invoice figure including VAT results in over-deduction. CIS is calculated on the VAT-exclusive net amount. Where a subcontractor is VAT-registered, VAT must be stripped out before any calculation begins.

How Subcontractors Should Structure Their CIS Invoice

A CIS-compliant invoice does more than satisfy a legal requirement — it protects the subcontractor from over-deduction and protects the contractor from HMRC challenge. Every subcontractor invoice should show these elements as clearly separated line items:

Frequently Asked Questions

Does CIS deduction apply to materials on a subcontractor invoice?

No. The direct cost of materials genuinely purchased by the subcontractor for the job is excluded from the CIS deduction calculation. The contractor deducts tax only from the remaining amount — essentially the labour component plus any non-qualifying items such as travel and accommodation. However, materials must be clearly itemised and evidenced; the contractor has a duty to verify the material cost is not overstated.

Does CIS apply to plant hire?

It depends on who owns the plant. If the subcontractor hired the plant from a third-party hire company, the hire cost is treated as materials and excluded from the CIS calculation. If the subcontractor owns the plant and charges for its use, no exclusion is available — the charge is treated as part of the labour element and CIS deduction applies.

Is accommodation subject to CIS?

Yes. Hotel costs, lodging and other accommodation recharged by the subcontractor to the contractor as part of the construction contract are included in the gross amount from which CIS deduction is calculated. They cannot be excluded as materials. The subcontractor can, however, claim tax relief on these costs through their own tax return as a business expense.

Does CIS apply to travel and subsistence?

Yes. HMRC's CIS340 guide and CISR15080 confirm that any travelling expenses (including fuel for travel), subsistence costs, and accommodation paid to or on behalf of the subcontractor are included in the gross amount from which the CIS deduction is made. These items form part of the CIS base.

Does CIS apply to VAT on an invoice?

No. VAT is excluded from the CIS calculation where the subcontractor is VAT-registered. CIS deduction is applied to the VAT-exclusive net amount only. Applying CIS to the VAT-inclusive total is a common over-deduction error.

What is the CIS deduction rate in 2025/26?

There are three rates: 0% for subcontractors holding HMRC Gross Payment Status; 20% for subcontractors registered under CIS; and 30% for unregistered subcontractors. The contractor confirms the applicable rate by verifying the subcontractor with HMRC before making the first payment under a new contract.

Can a subcontractor claim back CIS deductions?

Yes. CIS deductions are advance payments towards the subcontractor's tax liability, not an additional charge. Sole traders and partners reclaim any overpayment through their annual Self Assessment CIS refund claim. Limited companies offset CIS deductions suffered against their PAYE/NIC liabilities each month via the Employer Payment Summary (EPS), with any excess refunded or credited against Corporation Tax at year end — see our guide to CIS refunds for limited companies for the full process.