Example: CIS Deduction Calculation

Scenario

Mainstream Builders Ltd (the contractor) hires Sparky Joe (a registered subcontractor) to wire a new commercial unit in May 2025. Joe's invoice:

(Assume the supply meets all domestic reverse-charge conditions, including that the customer is not an end user; registration alone does not establish that the VAT domestic reverse charge applies — the customer accounts for the VAT.)

Step 1: Identify deductible amount

Assume the materials and hired-plant figures are evidenced direct costs paid by Joe, with no mark-up. Deduct allowable direct costs and VAT from the payment before applying CIS; not every amount labelled materials or plant is excluded.

• Deductible (labour): £4,000
• Excluded (materials + plant + VAT): £1,200 + £300 + £1,100 = £2,600

Step 2: Apply the deduction rate

Joe is registered → 20% rate.

CIS deduction = £4,000 × 20% = £800

Step 3: Calculate the payment to Joe

Mainstream Builders accounts for the £1,100 VAT itself on its own VAT return (input £1,100, output £1,100 — net zero).

Step 4: Issue a Payment & Deduction Statement

Within 14 days of the end of the tax month, Mainstream gives Joe a written statement showing:

• Gross amount £5,500 (or £4,000 labour, £1,500 materials/plant, depending on convention)
• Deduction £800
• Verification number
• Period covered

Step 5: CIS300 monthly return

The May tax month runs 6 May to 5 June 2025. Mainstream files the CIS300 by 19 June 2025, listing every subcontractor paid in that period — including:

• Joe's UTR and verification reference
• Total payments £5,500
• Materials £1,500
• Deduction £800

Step 6: Pay HMRC

The £800 deduction must reach HMRC by:

• 22 June 2025 (electronic payment) or
• 19 June 2025 (postal cheque)

If Mainstream's total monthly PAYE/CIS bill is under £1,500, it can pay quarterly — but most contractors pay monthly.

Step 7: How Joe reclaims the £800

Sparky Joe is self-employed, so the £800 is offset against his Self Assessment income tax + Class 4 NI bill for 2025/26. Excess deductions are refunded after his SA return is processed.

If Joe traded through a limited company, claim CIS deductions through EPS against PAYE liabilities and follow HMRC’s excess-deduction process. Do not claim them through CT600. See HMRC CIS deductions.

Common mistakes shown by this example

• Deducting CIS from the gross £5,500 (would be £1,100, overpaying by £300)
• Forgetting the reverse charge and adding VAT on top
• Issuing the payment statement late (penalty £100 per occurrence)
• Filing the CIS300 a day late — automatic £100 penalty

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General guidance, not tax advice. Speak to a qualified accountant for advice tailored to your situation. Figures relate to the 2025/26 UK tax year. Source: HMRC, gov.uk.