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Part 3 of 7 · CIS deduction checker series ~5 min read

Labour, materials, and the line between them

The deduction rate is a fact HMRC gives you. The amount it is applied to is a claim a subcontractor makes, on an invoice they wrote, and the scheme makes checking that claim the contractor’s job. That is the whole of this post.

Key takeaways

  • Out of the base: VAT, and what the subcontractor paid for materials, consumables, plant hire, non-travel fuel and prefabrication.
  • Only costs the subcontractor paid directly for this contract. Travel and profit stay in.
  • No receipts is allowed, with an estimate. An estimate nobody checked is not.
  • An inflated materials line under-deducts, and HMRC can seek that from the contractor.
  • A missed materials line over-deducts, and the subcontractor waits months to see it again.

From invoice total to deduction

Calculating a CIS deduction base from a subcontractor invoiceA vertical chain inside an AWS account container, entered from a box on the left labelled An invoice, read once as it arrives. Take out VAT charged by a VAT-registered subcontractor. Take out materials bought by the subcontractor for this contract, with a side exit reading no receipts: Ask for evidence, meaning receipts or a reasoned estimate. Take out plant and fuel, meaning hire and consumables but not fuel for travel. The deduction base, which is labour, travel, overheads and profit. Apply the rate from the verification record the invoice names. A note says the exit is not a rejection, but the one point where anybody is asked for anything, and where the number becomes defensible.AWS ACCOUNTAn invoiceread once, as itarrivesTake out VATcharged by a VATregistered subTake out materialsbought by them,for this contractAsk for evidencereceipts, or areasoned estimateno receiptsTake out plant and fuelhire, consumables,not travel fuelThe deduction baselabour, travel,overheads, profitApply the ratefrom the verificationit namesThe exit is not a rejection. It is the one point where anybody is asked for anything, and where the number becomes defensible.
Fig 1. Five steps, one of which needs a document. The rest is arithmetic on figures the read has already separated.
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What comes out, from the guidance

HMRC’s CIS guidance lists what comes out of the gross payment before the deduction: what the subcontractor actually paid for materials, consumable stores, fuel other than fuel for travelling, plant hire, and the manufacture or prefabrication of materials, all used in the construction work. Where the subcontractor is VAT registered, the VAT they charge comes out of the gross. Where they are not, the VAT they paid on those costs was a real cost to them and comes out along with the costs.

Two words carry most of the weight. Actually means the price paid, not a list price and not a marked-up resale figure. Directly — the guidance allows the reduction only where the subcontractor directly paid for materials bought to fulfil that contract — means anything the main contractor supplied has no business on the subcontractor’s invoice at all.

The two directions of wrong

A plasterer invoices GBP 3,860 for a month on a flat conversion, as one line. GBP 1,240 of that was plaster, beads and adhesive bought from a merchant. Deducted on the lot at 20 per cent, the deduction is GBP 772. Deducted on the correct base of GBP 2,620 it is GBP 524. The GBP 248 is not lost, but a sole trader sees it again only through Self Assessment and a limited company has to reclaim it through its own payroll submissions, so a subcontractor on thin margins notices within the week.

The other direction is the one that costs the contractor. The Leicester contractor’s groundworks subcontractor invoiced GBP 214,600 over the year and described 46 per cent of it as materials. When HMRC asked, receipts supported 19 per cent. The unsupported GBP 57,942, at 20 per cent, is GBP 11,588.40 of deduction that should have been made and was not, and the guidance says in terms that where the materials element looks excessive HMRC may seek to recover the under-deduction from the contractor.

Three subcontractors, one pattern

Materials claimed by three subcontractors, evidenced and unevidencedThree stacked vertical bars in thousands of pounds. Groundworks claimed about ninety-eight thousand seven hundred pounds of materials: forty thousand eight hundred with receipts and fifty-seven thousand nine hundred with nothing behind them. Roofing claimed about forty-one thousand seven hundred: seventeen thousand nine hundred evidenced and twenty-three thousand eight hundred not. Dry-lining claimed about twelve thousand nine hundred: three thousand four hundred evidenced and nine thousand five hundred not. A note says ninety-one thousand two hundred and seventeen pounds of materials with nothing behind them is nineteen thousand one hundred and eighty-nine pounds forty under-deducted, found by HMRC rather than by the contractor.GBP 0GBP 50GBP 100GBP 150GBP 200~GBP 98.7Groundworks~GBP 41.7Roofing~GBP 12.9Dry-liningMaterials claimed with receipts, GBP thousandsMaterials claimed with nothing behind them, GBP thousandsGBP 91,217 of materials with nothing behind them: GBP 19,189.40 under-deducted, found by HMRC rather than by the contractor.
Fig 2. Materials claimed by three subcontractors over the year, in thousands of pounds, split by whether anything supported the figure. The red bands are the whole of the shortfall.

How the three add up

The roofer’s unsupported materials came to GBP 23,815, which at 20 per cent is GBP 4,763. The dry-liner was unmatched and deducted at 30 per cent, so their GBP 9,460 is GBP 2,838. Add the groundworker’s GBP 11,588.40 and the total is GBP 19,189.40, from three subcontractors out of fourteen. The other eleven either sent receipts as a matter of habit or were paid gross, where materials make no difference to the deduction.

No receipts is not the same as no answer

The guidance allows for a subcontractor without receipts: ask for evidence, and if there is none, estimate the cost. What it does not allow is a figure nobody looked at, because it also says the contractor must check that the materials part is not overstated. So every materials figure gets one of three states, and only one of them is a problem.

Evidenced means receipts are attached and total to the claim within a tolerance. Estimated means a person accepted a figure without receipts and wrote down why: the job, the quantities, the same subcontractor’s evidenced months for comparison. Unsupported means neither, and an unsupported figure stays in the deduction base until it becomes one of the other two. That is deliberately the cautious direction. An over-deduction is money the subcontractor gets back; an under-deduction is money the contractor pays.

What one invoice read produces

  • Lines. Each one labour | materials | plant_hire | consumables | fuel | travel | mixed.
  • VAT. The amount charged, and any reverse-charge wording, verbatim.
  • UTR. As printed, which selects the verification record.
  • Receipts. Those attached to the same email, with their totals.
  • Materials state. evidenced | estimated | unsupported, never blank.
  • Base and deduction. Stored with every figure they came from.

Lump sums get one extra check. Where a subcontractor who normally splits out materials sends a single figure, the read marks the line as mixed rather than guessing a split, and a query goes back asking for one. A guessed split in either direction is one of the two errors above, just made faster.

The next post is the other line on the invoice that is easy to key as written and wrong: the VAT, on supplies where there should not be any.

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