CIS Calculation Example – How to Calculate CIS Tax?

The contractor needs to calculate the gross amount, the qualifying materials and the tax to deduct. These 3 pieces of information are what is filed with HMRC.

Gross amount – The gross amount is the total invoiced. If the subcontractor is VAT registered the contractor would exclude VAT from the total.

Qualifying materials – The qualifying materials are the costs, which the subcontractor has incurred. For example a decorating subcontractor would recharge the paint they have purchased. This is a big topic on CIS so we have wrote a blog CIS materials, which covers this in much more detail.

CIS tax to deduct – The contractor deducts the qualifying materials from the gross amount, which gives a labour amount. Then the contractor calculates the tax to deduct by applying the CIS tax rate to the labour amount.

In this first example the contractor has already verified the subcontractor and the CIS tax rate to deduct is 20%. See our blog CIS subcontractor verification for more information on this.

The contractor has received the following invoice from the subcontractor:

Labour £500 + VAT £100
Materials £200 + VAT £40
Total Invoiced is £700 + VAT £140

The figures, which the contractor needs to report to HMRC are therefore as follows:

Gross amount – £700 – this is the total amount invoiced not including VAT.

Qualifying materials – £200 – this is the qualifying materials per the invoice not including VAT.

CIS tax to deduct – £100 – This is calculated as the gross amount of £700 less the materials of £200. Giving a figure of £500 which is then multiplied by the CIS tax rate of 20%. This then gives the £100 CIS tax to deduct.

The contractor would therefore pay HMRC CIS Tax of £100 and the subcontractor £740.

N.B In many cases the VAT on a subcontractor invoice should be reverse charge. See when Reverse Charge VAT applies in the Construction Industry.

Let us assume that the subcontractor in the above example was not VAT registered. The invoice would now look as follows:

Labour £500
Materials £240
Total Invoiced is £740

Note that as the subcontractor is not VAT registered they can’t reclaim the VAT back on the materials. They will therefore recharge the full cost including VAT to the contractor.

The figures which the contractor needs to report to HMRC are as follows:

Gross amount – £740 – this is the total amount invoiced – no VAT has been charged so none is deducted.

Qualifying materials – £240 – this is the qualifying materials per the invoice.

CIS tax to deduct – £100 – This is calculated as the gross amount of £740 less the materials of £240. Giving a figure of £500 which is then multiplied by the CIS tax rate of 20%. This then gives the £100 CIS tax to deduct.

The contractor would therefore pay HMRC CIS Tax of £100 and the subcontractor £640.

Note: In both examples the CIS tax to deduct is £100. This is because CIS is a tax on labour which in both examples remained the same i.e £500.

For convenience we have created a CIS Tax Deduction Calculator, which will assist in calculating the CIS deductions.

We have additional CIS calculation examples within our blog on CIS materials. The additional CIS calculation examples explain how to calculate CIS tax on different types of materials including plant hire, fuel, accommodation, etc.

There are further examples in Appendix D of the HMRC CIS Manual.