How CIS Applies to Materials in the UK Construction Industry

The Construction Industry Scheme (CIS) is a key tax framework that governs payments between contractors and subcontractors in the UK construction sector. Designed to reduce tax evasion, CIS requires contractors to deduct a percentage from subcontractor payments and pass it to HMRC. However, a common area of confusion is whether CIS applies to materials costs or just labour charges.

For contractors and subcontractors, correctly handling materials under CIS is essential to remain compliant and avoid financial penalties. In this article, we’ll break down how CIS applies to materials, clarify common mistakes, and explain how to correctly separate costs on invoices to ensure proper tax treatment.

What is CIS and Who Does It Apply To?

A Quick Overview of the Construction Industry Scheme (CIS)

CIS is a UK tax scheme that applies to payments for construction work, ensuring that subcontractors pay the correct amount of tax and National Insurance. Under CIS, contractors must deduct 20% (for registered subcontractors) or 30% (for unregistered subcontractors) from payments and submit them to HMRC.

Who Needs to Register for CIS?

CIS applies to individuals and businesses involved in construction work in the UK, including:

• Sole traders, partnerships, and limited companies working as subcontractors
• Contractors who pay subcontractors for construction work
• Non-construction businesses that spend over £3 million annually on construction

Certain types of work, such as architecture and surveying, are exempt from CIS.

Understanding CIS Deductions: Labour vs. Materials

A crucial aspect of CIS is knowing what costs are subject to deductions and what are exempt.

✅ Labour costs – CIS applies only to the labour element of a subcontractor’s invoice.
❌ Materials costs – CIS does not apply to materials, as subcontractors should be reimbursed for these expenses in full.

This means that contractors should not deduct CIS on materials, but they must ensure that labour and materials are clearly separated on invoices.

Does CIS Apply to Materials?

HMRC’s Official Stance on CIS and Materials

HMRC states that CIS deductions should not be applied to materials. Instead, subcontractors must be reimbursed for the actual cost of materials they purchase to complete a job.

However, if an invoice does not clearly separate labour and materials, HMRC may assume the entire payment is for labour and deduct CIS accordingly. This is why correct invoicing practices are essential.

Common Mistakes When Applying CIS to Materials

1. Deducting CIS from the full invoice – Some contractors mistakenly apply CIS to the total amount instead of only the labour portion.
2. Not separating labour and materials clearly – If costs are lumped together, CIS may be deducted incorrectly.
3. Overclaiming materials costs – Subcontractors must ensure that only genuine materials costs are included, as HMRC may challenge excessive claims.

How to Separate Labour and Materials Costs on Invoices

Best Practices for CIS Invoicing

To avoid unnecessary CIS deductions, invoices must clearly break down:

• Labour costs (subject to CIS)
• Materials costs (excluded from CIS)

Example of a Correctly Formatted CIS Invoice

This approach ensures that only the labour element is taxed under CIS.

Invoices That Do Not Clearly Separate Costs

❌ “Construction work completed – £3,500”

• HMRC may assume the entire payment is for labour and apply CIS to the full amount.

✅ “Labour: £2,000 | Materials: £1,500”

• This ensures CIS is deducted only from labour costs.

How HMRC Checks CIS Compliance on Materials

What Happens If Materials Are Not Properly Recorded?

If a contractor incorrectly deducts CIS on materials, the subcontractor may receive less than they are owed, leading to cash flow problems.

If a subcontractor overclaims materials costs, HMRC may investigate and impose penalties for incorrect CIS reporting.

Penalties for CIS Non-Compliance

• Failure to deduct CIS correctly – Contractors may face fines and be required to repay any shortfall to HMRC.
• Incorrect materials claims – Subcontractors making excessive claims can be audited and fined.
• Late CIS submissions – Delays in submitting CIS returns lead to automatic penalties.

Maintaining accurate records and separating costs correctly is key to avoiding HMRC scrutiny.

Special Cases and Exceptions

There are certain situations where materials and labour costs may be intertwined. Here’s how to handle them:

1. Supply and Fit Services

• If a subcontractor provides both materials and labour, only the labour portion is subject to CIS.
• The cost of materials must be separately itemised on the invoice.

2. Plant Hire and Equipment Costs

• Plant hire (without an operator) – Not subject to CIS.
• Plant hire with an operator – Labour charges for the operator are subject to CIS, but the hire cost itself is exempt.

3. Scaffolding and Temporary Structures

• Erecting scaffolding – CIS applies to labour, but material costs are excluded.
• Hiring scaffolding – The hire cost is not subject to CIS.

Understanding these exceptions ensures correct CIS deductions and compliance.

How LT Accounting Can Help

CIS compliance can be complex, especially when handling materials and labour costs correctly. LT Accounting offers:
✅ Expert CIS bookkeeping to ensure accurate invoicing
✅ CIS return filing to prevent errors and penalties
✅ HMRC compliance support to reduce audit risks

Whether you’re a contractor or a subcontractor, we help ensure your CIS obligations are met efficiently.

📞 Contact LT Accounting today for expert CIS support!

Conclusion

Understanding how CIS applies to materials is crucial for compliance and accurate tax reporting. Remember:

• CIS applies to labour, not materials
• Invoices must clearly separate labour and materials costs
• Mistakes can lead to incorrect deductions and HMRC penalties

By following best practices and seeking professional help, contractors and subcontractors can avoid costly errors and ensure smooth CIS compliance.

Need help with CIS? LT Accounting is here to assist you! 🚀