CIS is deducted from the payment for construction work after VAT has been excluded from the CIS calculation. In practice, work out the CIS deduction on the labour element, excluding VAT and qualifying materials. Then show VAT separately using either normal VAT or the domestic reverse charge.
- Never calculate CIS on a VAT-inclusive total.
- CIS usually applies to labour after qualifying materials have been removed.
- With normal VAT, the customer pays the VAT but still excludes it from the CIS deduction base.
- With the domestic reverse charge, the customer accounts for VAT and does not pay that VAT to the subcontractor.
The short answer
CIS is calculated before VAT is added to the amount due. More precisely, VAT is excluded from the amount on which the contractor works out the CIS deduction.
For a straightforward invoice:
- Separate labour from qualifying materials.
- Calculate CIS on the labour amount.
- Calculate VAT separately.
- Show the gross invoice value, CIS deduction and final cash due.
This is why a 20% CIS rate and a 20% VAT rate can produce different figures. The percentages may match, but the calculation bases do not.
HMRC’s Construction Industry Scheme guide states that VAT and qualifying materials are excluded when the contractor calculates the deduction.
Worked example with normal VAT
A VAT-registered subcontractor invoices:
- labour: £3,000
- qualifying materials: £1,200
- subtotal before VAT: £4,200
- VAT at 20%: £840
- invoice total: £5,040
The contractor does not deduct CIS from £5,040. It excludes the £840 VAT and £1,200 qualifying materials, leaving a £3,000 CIS deduction base.
| Calculation | Amount |
|---|---|
| Labour | £3,000 |
| Qualifying materials | £1,200 |
| Subtotal before VAT | £4,200 |
| VAT at 20% | £840 |
| Gross invoice total | £5,040 |
| CIS at 20% of £3,000 labour | -£600 |
| Cash paid to subcontractor | £4,440 |
The subcontractor receives £4,440. The £600 difference is the CIS deduction the contractor reports and pays to HMRC.
The worked CIS invoice template shows the same calculation at 0%, 20% and 30%.
Worked example with the VAT reverse charge
Now use the same £3,000 labour and £1,200 materials, but assume the domestic reverse charge applies.
The taxable supply remains £4,200. VAT at 20% is £840, but the subcontractor does not add that £840 to the cash due. The contractor accounts for it through its VAT return.
| Calculation | Amount |
|---|---|
| Labour | £3,000 |
| Qualifying materials | £1,200 |
| Taxable supply | £4,200 |
| Reverse-charge VAT accounted for by customer | £840 |
| VAT added to cash due | £0 |
| CIS at 20% of £3,000 labour | -£600 |
| Cash paid to subcontractor | £3,600 |
The VAT calculation uses the taxable supply of £4,200. The CIS calculation uses the £3,000 labour amount. The reverse-charge invoice example shows the required layout and checks.
Why people describe it as “before VAT”
“Before VAT” is useful shorthand, but it can hide two separate decisions:
- which part of the payment is subject to CIS
- which VAT treatment applies to the supply
CIS does not simply mean taking 20% from every pre-VAT subtotal. Qualifying materials supplied by the subcontractor are normally removed from the deduction base as well.
VAT treatment also changes the cash paid. Under normal VAT, the customer pays the VAT amount to the supplier. Under the domestic reverse charge, the customer accounts for the VAT and does not pay it to the supplier.
Work through both calculations separately instead of trying to combine them into one percentage.
What counts as the CIS deduction base?
Start with the relevant payment for construction work, then exclude:
- VAT
- qualifying materials supplied by the subcontractor
- other amounts HMRC says should not form part of the deduction calculation
The remaining amount is usually the labour element, although plant, manufacture and mixed contracts can need closer checking.
Do not invent a materials figure to reduce the deduction. Use the actual direct cost allowed under the CIS rules and keep the supporting purchase records. The guide to what counts as CIS materials explains the evidence trail.
Does CIS come off the net or gross invoice?
This depends on what “net” and “gross” mean in the conversation.
On a CIS invoice, it is clearer to name each figure:
- subtotal before VAT: labour plus materials before VAT
- VAT: charged normally or shown for the customer to account for
- gross invoice total: full value shown on the invoice
- CIS deduction base: the amount subject to CIS after exclusions
- CIS deduction: the amount withheld
- amount due: cash the customer must send
Avoid saying only “net invoice” because one person may mean before VAT while another means after CIS.
What if the subcontractor is not VAT registered?
A subcontractor that is not VAT registered does not add VAT to its invoice. The contractor still calculates CIS using the normal CIS rules, excluding qualifying materials from the relevant payment.
For £3,000 labour and £1,200 qualifying materials at a 20% CIS rate:
- invoice total: £4,200
- CIS deduction base: £3,000
- CIS deduction: £600
- amount due: £3,600
Do not put a VAT number or VAT charge on an invoice if the business is not VAT registered.
What if the subcontractor has gross payment status?
Gross payment status means the contractor normally makes no CIS deduction, so the CIS rate is effectively 0% for that verified subcontractor.
VAT remains separate. Under normal VAT, the contractor pays the VAT-inclusive invoice total. Under the reverse charge, the contractor accounts for the VAT and pays the pre-VAT cash amount.
The contractor must verify the subcontractor and use the treatment HMRC returns. The subcontractor should not choose 0%, 20% or 30% based only on what appeared on an earlier job.
Does the reverse charge always apply when CIS applies?
No. CIS and the domestic reverse charge overlap, but they are not the same test.
The reverse charge generally requires a covered standard- or reduced-rate construction service, both parties to be VAT registered, and a customer making an onward supply rather than acting as an end user. HMRC’s domestic reverse-charge guidance gives the full conditions.
Normal VAT can still apply to work within CIS. For example, the customer may be an end user that has notified the supplier of that status.
How should the invoice show CIS and VAT?
Show enough detail for the contractor to reproduce the calculation:
- labour amount
- qualifying materials amount
- subtotal before VAT
- VAT rate and amount, or reverse-charge treatment
- gross invoice value
- CIS deduction base
- CIS rate and deduction
- final amount due
On a reverse-charge invoice, include a clear statement that the customer accounts for VAT to HMRC. Do not add reverse-charge VAT to the cash amount due.
Sendinvo’s CIS invoice feature shows the gross total, CIS deduction and net amount due together. It does not decide whether CIS or the reverse charge applies, verify a subcontractor or file the contractor’s return.
Common mistakes
Deducting CIS from the VAT-inclusive total
This overstates the deduction because VAT should be excluded.
Removing all materials without evidence
Only qualifying materials supplied by the subcontractor should be removed using the correct cost and records.
Treating CIS and VAT as the same 20%
The rates can both be 20%, but CIS may use labour while VAT uses the taxable supply.
Adding reverse-charge VAT to the amount due
The customer accounts for reverse-charge VAT. It is not cash collected by the subcontractor.
Assuming CIS automatically means reverse charge
Check each scheme separately. The customer may be an end user, one party may not be VAT registered, or the service may fall outside the reverse-charge conditions.
Hiding the final amount due
Print the gross value, deduction and cash due clearly. Do not leave the contractor to reconstruct the calculation.
FAQ
Is CIS deducted before or after VAT?
CIS is calculated after VAT has been excluded from the deduction base. In shorthand, this means CIS is deducted before VAT is added to the cash total.
Do you deduct CIS from the total including VAT?
No. VAT is excluded. Qualifying materials are normally excluded as well, leaving the relevant labour amount as the CIS base.
Is CIS deducted from labour only?
It is commonly calculated on labour after qualifying materials and VAT are excluded, but plant, manufacture and mixed contracts may require the detailed HMRC rules.
What happens when the VAT reverse charge applies?
The customer accounts for VAT instead of paying it to the subcontractor. CIS is still calculated separately on the correct deduction base.
Can CIS and VAT both be 20%?
Yes, but they are different calculations. VAT can be 20% of the taxable supply while CIS is 20% of the labour amount after exclusions.
Does every CIS invoice use the VAT reverse charge?
No. The reverse charge has its own conditions, including VAT registration, covered services and the customer’s end-user status.
One last thing
Write the two calculations on separate lines. First establish labour, materials and the CIS deduction. Then show normal VAT or reverse-charge VAT separately. If the contractor can see the base used for each figure, the final payment is much easier to check.