Under the Construction Industry Scheme (CIS), a contractor takes a chunk out of every payment to a subcontractor and hands it to HMRC. The thing that catches people out is that the deduction does not come off the whole invoice. It comes off the labour only.
Get the materials split right and your subcontractor keeps more cash in the bank now, with less tied up waiting to be reclaimed. Get it wrong and you either over-deduct (squeezing the subcontractor's cash flow) or under-deduct (leaving the contractor on the hook to HMRC).
This guide explains exactly what counts as materials, where plant hire, fuel and consumables sit, and the one trap that snares subcontractors who own their own kit. It is written for contractors and subcontractors operating under CIS. If you want this run for you each month, that is what we do for construction businesses.
How does the CIS deduction split materials from labour?
When a contractor pays a subcontractor under CIS, they do not apply the deduction to the gross invoice. They first strip out the cost of materials and certain other items, then apply the CIS percentage to what is left, which is effectively the labour element plus any profit.
The standard deduction rates for 2026/27 are unchanged:
| Subcontractor status | CIS deduction rate |
|---|---|
| Registered (net payment status) | 20% |
| Not registered with HMRC | 30% |
| Gross payment status | 0% |
So if a registered subcontractor invoices £1,000 made up of £400 materials and £600 labour, the 20% deduction applies to the £600 labour, not the £1,000. That is £120 to HMRC, not £200. The subcontractor receives £880, and the £120 is credited against their eventual tax and National Insurance bill.
That single split, materials versus labour, is the whole game. Everything below is about getting the materials figure right.
What counts as materials under CIS?
HMRC lets the contractor take the following off the gross payment before applying the deduction rate, where they relate to the construction work being paid for:
- Materials.
- Consumable stores (equipment that is now unusable).
- Fuel used, except fuel for travelling.
- Plant hire (equipment hired for the job).
- The cost of manufacturing or prefabricating materials.
- VAT, where the subcontractor is VAT-registered (you never apply the CIS deduction to VAT).
There are two firm rules around the materials figure.
First, it must be the direct cost the subcontractor actually paid. The subcontractor cannot mark up the materials and have the inflated figure excluded from the deduction. HMRC's own guidance is blunt: it is only where a subcontractor directly pays for the materials to fulfil a particular contract that the cost may be deducted. As the contractor, you must check and keep records so the materials part of the payment is not overstated.
Second, you can ask the subcontractor for evidence, for example receipts, that they paid for the materials directly. If they have no evidence, you make a reasonable estimate of the cost rather than simply accepting their figure.
For VAT-registered subcontractors, you exclude the VAT element of the invoice from the deduction entirely. For subcontractors who are not VAT-registered, any VAT they paid on their materials forms part of the material cost they incurred, so it sits inside the materials figure you exclude.
How are plant, fuel and consumables treated?
This is where most disagreements on site start, because "plant" and "fuel" do not behave the same way.
Plant hire. If the subcontractor hires plant or equipment from a third party to do the job, the hire cost can be treated as materials and taken off before the deduction. A digger hired in for a week, scaffolding, an access platform: the genuine third-party hire charge comes out of the deduction base.
Fuel. Fuel used to run that plant on the job can be treated as materials. The important exception is fuel used for travelling, for example diesel to drive the van to and from site. That stays inside the labour figure and the deduction applies to it.
Consumable stores. Items that get used up and become unusable in the course of the work, the classic example being abrasive discs, sealants or similar, count as materials.
The common thread is that these are real costs the subcontractor incurs to complete the construction work, not a charge for their time or skill. The deduction is a payment on account of the subcontractor's own tax, and it is only ever meant to bite on the labour and profit element, never on genuine pass-through costs.
The trap: do you own the plant or hire it in?
Here is the point that costs subcontractors money, and it turns entirely on ownership.
If the subcontractor hires plant in from a third party, the hire cost is treated as materials and comes off before the deduction.
If the subcontractor owns the plant they use on the job, there is no notional deduction for plant hire. They cannot invent a "plant charge" for their own digger and have it excluded. HMRC's wording is clear: where the subcontractor owns the plant used in executing the work, no notional deduction for plant hire may be made.
The one piece that survives is fuel. Even where the subcontractor owns the plant, the consumable fuel used to run it on the job can still be treated as materials. So an owner-operator excludes the fuel for the machine, but not a made-up hire charge for the machine itself.
In practice this is the single most common CIS materials error we see on owner-operator invoices: a line for "plant" on kit the subcontractor owns outright. That line should be in the labour base and suffer the deduction.
Illustrative example: splitting a subcontractor invoice
Illustrative example. Imagine Daniel is a registered CIS subcontractor (20% net status) hired by a contractor for groundwork. He owns his own mini-digger. His invoice for the month is £4,000 plus VAT, and he is not VAT-registered. He breaks it down like this:
| Invoice line | Amount | Treated as materials? |
|---|---|---|
| Aggregate and pipe (bought direct, receipts held) | £900 | Yes |
| Scaffold tower hired from a hire firm | £250 | Yes (third-party plant hire) |
| Diesel to run the digger on site | £150 | Yes (consumable fuel) |
| Notional charge for use of his own digger | £300 | No (he owns it) |
| Labour | £2,400 | No |
The materials the contractor can exclude are £900 + £250 + £150 = £1,300. The £300 charge for Daniel's own digger is not an allowable materials deduction, so it stays in the figure the deduction applies to.
That leaves £4,000 - £1,300 = £2,700 as the amount the 20% deduction bites on. The CIS deduction is £2,700 x 20% = £540. Daniel receives £4,000 - £540 = £3,460, and £540 is paid to HMRC against his tax and National Insurance.
If the contractor had wrongly excluded the £300 own-plant charge as materials, the deduction base would have been £2,400, the deduction £480, and the contractor would have under-deducted by £60, a shortfall HMRC can pursue from the contractor.
These figures are illustrative. Your own split depends on the real costs, the evidence held, and the subcontractor's VAT and CIS status.
What changes for CIS from April 2026?
Two genuine changes took effect for CIS from 6 April 2026, and it is worth being precise because a lot of commentary muddles the timeline.
From 6 April 2026:
- Nil returns are back. A contractor who pays no subcontractors in a month must file a nil monthly return, unless they have told HMRC in advance they will make no payments that month. This reinstates an obligation that was removed in 2015.
- Local authorities and public bodies are out of scope. Payments made to a local authority or a qualifying public body for construction work fall outside CIS, so contractors do not make deductions from them.
It is a common misconception that the VAT compliance test for gross payment status arrived in April 2026. It did not. The measure that added VAT filing and payment obligations to the gross payment status compliance test, and that lets HMRC cancel gross payment status immediately where it has reasonable grounds to suspect fraud relating to VAT, PAYE, Income Tax Self Assessment or Corporation Tax, took effect from 6 April 2024. It is firmly in force now, not a forthcoming change. If you hold or are applying for gross payment status, your VAT record matters: more than three VAT returns filed late, or any return more than 28 days late, or VAT of £100 or more unpaid at the application date, can fail the compliance test.
None of these administrative changes alters the materials versus labour split itself. The way you strip out materials, plant hire, fuel and consumables before applying the deduction is unchanged for 2026/27.
If gross payment status would help your cash flow, or you are not sure your monthly returns and materials splits are watertight, this is exactly the kind of thing we handle for CIS contractors. Joined-up CIS, VAT and year-end accounts keep you off HMRC's radar and your cash where it belongs.
Want your CIS deductions and returns handled properly each month? Book a free call with a Zmartly accountant and we will review where you stand.
Frequently asked questions
Does the CIS deduction apply to materials?
No. The CIS deduction only applies to the labour element of a payment, plus any profit. The contractor strips out the cost of materials, consumable stores, fuel used on the job, plant hire and VAT before applying the 20% or 30% rate to what remains.
Can a subcontractor add a profit margin to materials under CIS?
No. Only the direct cost the subcontractor actually paid for materials can be excluded from the deduction. They cannot mark materials up and have the inflated figure taken off. The contractor must keep records and check the materials figure is not overstated, asking for receipts where needed.
Is plant hire deducted before the CIS deduction?
Yes, but only genuine third-party hire. If the subcontractor hires plant in from a hire firm, that cost is treated as materials and comes off before the deduction. If the subcontractor owns the plant, no notional plant-hire charge can be excluded, though the fuel used to run it can still be treated as materials.
How is fuel treated under CIS?
Fuel used to run plant and carry out the construction work counts as materials and is deducted before the CIS rate is applied. The exception is fuel for travelling, such as diesel to drive to and from site, which stays in the labour figure and is subject to the deduction.
What are the CIS deduction rates for 2026/27?
The rates are unchanged: 20% for subcontractors registered with HMRC for net payment, 30% for subcontractors who are not registered, and 0% for those holding gross payment status. The rate applies to the payment after materials and other allowable costs are removed.
Did the CIS rules change in April 2026?
Yes, but on administration rather than the materials split. From 6 April 2026, nil monthly returns are required again where no subcontractors are paid, and payments to local authorities and qualifying public bodies fall outside CIS. The VAT compliance test for gross payment status is older, in force since 6 April 2024.
