UK CIS Invoice Requirements: Deductions & Reverse Charge Guide

A CIS-compliant subcontractor invoice must separate labour costs from materials, display the correct deduction rate (20% for registered subcontractors, 30% for unregistered, or 0% for those holding gross payment status), and include the subcontractor's Unique Taxpayer Reference. When the domestic reverse charge also applies, the same invoice must carry the statement "Reverse charge: Customer to pay the VAT to HMRC" and show no VAT collected by the supplier. Getting either requirement wrong creates HMRC compliance exposure for both parties.

These obligations affect a significant portion of the UK economy. According to ONS construction industry data for Great Britain, over 370,000 VAT and PAYE registered construction firms were operating across Great Britain in 2024, each navigating UK CIS invoice requirements and domestic reverse charge rules on the invoices they issue and receive. Yet most available guidance covers only one scheme or the other, leaving contractors, subcontractors, and their AP teams to piece together the full picture from multiple sources.

This guide consolidates everything into a single reference written from the contractor and AP perspective. It covers the mandatory fields every construction industry scheme invoice must contain and how deduction rates are calculated, the domestic reverse charge rules and when they apply, a worked numerical example showing both CIS deductions and reverse charge on the same invoice, the contractor's step-by-step processing workflow from receipt through verification, and Payment and Deduction Statement obligations including record-keeping requirements.

The next section breaks down the specific fields and data points every CIS-compliant subcontractor invoice must include, along with how each of the three deduction rates is determined.

CIS Invoice Fields, Deduction Rates, and Gross Payment Status

Every subcontractor invoice submitted under the Construction Industry Scheme must include a specific set of fields for the contractor to process the payment correctly and meet HMRC reporting obligations. Missing or incomplete information delays payment and creates compliance risk for both parties.

A CIS-compliant subcontractor invoice must contain:

Subcontractor name and Unique Taxpayer Reference (UTR) number — the 10-digit UTR is essential for the contractor to verify CIS registration status with HMRC
Contractor name — the legal name of the business receiving the invoice
Invoice date and unique invoice number — for audit trail and record-keeping purposes
Description of construction work performed — sufficient detail to confirm the work falls within the scope of CIS
Labour costs separated from materials and consumables — this split must appear as distinct line items on the invoice
Applicable CIS deduction rate — 20%, 30%, or 0% depending on the subcontractor's registration status
CIS deduction amount — the calculated figure deducted from the labour portion
Net payment due after deduction — the final amount the contractor will pay

The labour and materials split is not optional. CIS deductions apply exclusively to the labour portion of an invoice. Materials, equipment hire, consumables, VAT, travel, and accommodation costs are all excluded from the deduction calculation. When a subcontractor fails to separate these figures clearly, the contractor is obligated to apply the deduction to the full invoice amount, which overstates the deduction and reduces the subcontractor's payment.

How the Three CIS Deduction Rates Work

HMRC assigns one of three deduction rates to every subcontractor based on their registration status:

20% — the standard rate for subcontractors who are registered with HMRC for CIS
30% — the higher rate applied to subcontractors who are not registered for CIS
0% — for subcontractors who hold gross payment status, meaning no deduction is taken

The contractor does not choose the rate. Before making any payment, the contractor must verify the subcontractor through HMRC's CIS verification service, which confirms the correct rate to apply.

Worked Deduction Calculation

Consider a subcontractor who invoices a contractor for £8,000 in labour and £3,000 in materials. The subcontractor is CIS-registered at the standard 20% rate.

CIS deduction: 20% of £8,000 (labour only) = £1,600
Materials: £3,000 (excluded from deduction)
Net payment to subcontractor: £8,000 + £3,000 - £1,600 = £9,400

The contractor pays £9,400 to the subcontractor and remits the £1,600 deduction to HMRC. That £1,600 is credited against the subcontractor's tax liability for the year.

Gross Payment Status and Qualification Criteria

Subcontractors who want to receive payments without any CIS deduction must apply to HMRC for gross payment status. Qualification requires passing three tests:

Business test — the applicant must be carrying on a business in the UK that includes construction work
Turnover test — the business must have a minimum annual turnover of £30,000 (excluding materials and VAT), or £30,000 per partner in a partnership
Compliance test — the applicant must have met all tax obligations on time, including Self Assessment returns, PAYE submissions, and CIS returns

Following an update effective April 2024, HMRC expanded the compliance test to include timely VAT return submission. Subcontractors who file VAT returns late now risk losing their gross payment status, even if all other obligations are current.

HMRC conducts annual reviews of gross payment status. Subcontractors who fail any of the three tests during a review period will have their status revoked, reverting them to the 20% or 30% deduction rate. The official HMRC guidance document for all Construction Industry Scheme obligations, including deduction rates and gross payment status criteria, is CIS 340.

CIS deductions are only half the picture. Where the subcontractor is VAT-registered and the work qualifies, the domestic reverse charge for VAT also applies to the same invoice, changing how VAT is accounted for entirely.

When the Domestic Reverse Charge Applies to Construction Invoices

The domestic reverse charge for construction services took effect in March 2021, introduced by HMRC specifically to combat missing trader fraud across the construction supply chain. Under this mechanism, the responsibility for accounting for VAT shifts from the supplier (subcontractor) to the customer (contractor). Instead of the subcontractor charging VAT and paying it to HMRC, the contractor receiving the service accounts for the VAT directly on their own VAT return.

Three conditions must all be met for the reverse charge to apply to a construction invoice:

The supply is of specified construction services within CIS scope. The work must fall within the construction operations defined by the Construction Industry Scheme. Standard construction activities such as site preparation, building work, alterations, repairs, and installations all qualify.
Both parties are VAT-registered and CIS-registered. The subcontractor issuing the invoice and the contractor receiving it must both hold active VAT registrations and be registered under CIS.
The contractor is not the end user of the services. The reverse charge only applies when the construction services are supplied for onward supply within the construction chain. If the contractor is the final consumer of the work, standard VAT rules apply instead.

What Changes on the Invoice

When the reverse charge applies, the subcontractor does not charge VAT on the invoice. The invoice shows the net amount only. However, the subcontractor must still indicate either the VAT amount that would have applied at the relevant rate or the applicable VAT rate itself, so the contractor knows exactly how much VAT to account for on their return.

The invoice must also carry one of two approved statements:

"Reverse charge: VAT Act 1994 Section 55A applies"
"Reverse charge: Customer to pay the VAT to HMRC"

Either wording is acceptable, but one must appear clearly on every reverse charge invoice. Omitting this statement is a compliance failure that can trigger queries from HMRC during VAT inspections.

Key Exceptions

The reverse charge does not apply in two important scenarios:

The contractor is the end user. If the contractor commissions construction work for their own final use rather than for onward supply, standard VAT treatment applies. A homeowner hiring a builder, or a main contractor constructing a building they will occupy themselves, would fall outside the reverse charge.
The supply is of completed buildings. Sales or supplies of finished buildings are excluded from the reverse charge, even between CIS-registered, VAT-registered parties.

For a detailed breakdown of standard UK VAT invoice fields and formatting rules that apply alongside the reverse charge, see our guide to UK VAT invoice rules and mandatory fields.

In practice, many construction invoices fall under both CIS deduction rules and the domestic reverse charge simultaneously. A subcontractor verified at the standard 20% CIS deduction rate who also meets all three reverse charge conditions will issue an invoice that requires both a CIS gross-to-net deduction calculation and reverse charge VAT treatment. The next section works through this exact scenario with a full numerical example.

CIS Deductions and Reverse Charge on the Same Invoice: A Worked Example

Where a subcontractor is both CIS-registered and VAT-registered, and the domestic reverse charge applies, both schemes affect the same invoice but through separate calculations. The following worked example breaks down exactly how each applies.

The Scenario

A CIS-registered, VAT-registered plastering subcontractor carries out work for a CIS-registered, VAT-registered main contractor. The main contractor is not an end user and will supply onward construction services, so the domestic reverse charge is in scope.

The subcontractor's invoice covers:

Labour: £10,000
Materials: £2,500

The subcontractor is verified at the 20% standard CIS deduction rate.

Step 1: Calculate the CIS Deduction

CIS deductions apply only to the labour element. Materials are excluded from the deduction calculation.

Component	Amount
Labour	£10,000
CIS deduction rate	20%
CIS deduction (20% of £10,000)	£2,000

The £2,500 materials cost is not subject to CIS deduction. The contractor withholds £2,000 and pays this to HMRC on behalf of the subcontractor.

Step 2: Apply the Domestic Reverse Charge for VAT

Because both parties are VAT-registered and CIS-registered, and the contractor is not an end user, the reverse charge applies. This means the subcontractor does not charge VAT on the invoice. Instead, the contractor self-accounts for VAT on the full value of the construction services.

The reverse charge applies to the total construction service value, which includes both labour and materials:

Component	Amount
Total construction service value (labour + materials)	£12,500
VAT rate	20%
VAT to self-account	£2,500

The contractor reports this on their VAT return as follows:

Box 1 (output tax): £2,500
Box 4 (input tax): £2,500
Net VAT effect for the contractor: £0

The two entries cancel each other out, producing a nil net position for the contractor. The subcontractor records the £12,500 as a zero-rated supply for reverse charge purposes in their own VAT return.

The Final Invoice Summary

The subcontractor's invoice should read:

Line item	Amount
Labour	£10,000
Materials	£2,500
CIS deduction (20% of labour)	-£2,000
VAT charged	£0.00
Net payment due to subcontractor	£10,500

The invoice must include the statement: "Reverse charge: Customer to pay the VAT to HMRC"

No VAT amount appears on the invoice itself. The contractor handles the VAT accounting entirely through their VAT return.

Why These Are Two Separate Calculations

This is the critical point that catches many contractor AP teams and subcontractors off guard. The CIS deduction and the reverse charge each operate on a different base:

CIS deduction base: Labour only (£10,000). Materials are excluded.
Reverse charge VAT base: Full construction service value, including materials (£12,500).

Applying the CIS deduction to the full £12,500, or applying the reverse charge to only the £10,000 labour figure, are common errors that lead to incorrect payments and VAT return mistakes. Keeping the two calculations distinct on every CIS and reverse charge invoice is essential for meeting UK construction invoice requirements accurately.

Knowing the maths is necessary but insufficient. The contractor's AP team also needs a consistent sequence of checks to apply to every incoming invoice, from verifying the subcontractor's registration status through to releasing the correct payment.

Processing CIS Invoices: The Contractor's Step-by-Step Workflow

Every subcontractor invoice that lands on your desk triggers the same sequence of checks. Missing a step creates errors that compound through your CIS returns, VAT filings, and payment runs. The following workflow covers each decision point from receipt to payment.

1. Verify CIS Registration Status with HMRC

Before making any payment to a subcontractor, verify their CIS registration status directly with HMRC. This verification confirms which deduction rate applies: 20% for registered subcontractors, 30% for unregistered subcontractors, or 0% for those holding gross payment status.

Verification is done through HMRC's online CIS service (accessible via your Government Gateway account) or through CIS-compatible payroll software. You will need the subcontractor's UTR number and either their National Insurance number (for sole traders) or company registration number (for limited companies).

You must complete this verification before the first payment under each new contract. For ongoing relationships, HMRC recommends re-verifying at least every tax year or whenever the subcontractor's details change. Record the verification reference number alongside the invoice for your audit trail.

2. Check the Labour and Materials Split

Review the invoice to confirm that labour costs are separated from materials, equipment hire, consumables, and any other non-labour charges. This split is critical because CIS deductions apply only to the labour element.

If the subcontractor has lumped everything into a single figure without breaking out materials, do not process the invoice. Request a revised invoice with the correct breakdown before proceeding. Processing a combined figure means you will either over-deduct (creating disputes) or under-deduct (creating HMRC liability).

3. Calculate the CIS Deduction

Apply the verified deduction rate to the labour portion only. For example, if the labour element is £8,000 and the subcontractor is registered at the standard rate, the deduction is £8,000 x 20% = £1,600.

Cross-check this figure against any deduction amount the subcontractor has shown on their invoice. Discrepancies usually stem from the subcontractor applying the rate to the gross total rather than to labour only, or from using an outdated rate. Resolve any mismatch before payment.

4. Determine Reverse Charge Applicability

Three conditions must all be met for the VAT domestic reverse charge to apply:

Both parties are VAT-registered and CIS-registered
The supply consists of construction services falling within the scope of CIS
The contractor is not an end user, meaning the services are for onward supply within the construction chain

If any one of these conditions is not met, standard VAT rules apply instead. The subcontractor's invoice should state whether the reverse charge applies, but the contractor carries the compliance risk if the treatment is wrong. Verify independently rather than relying solely on the invoice notation.

5. Process the VAT Correctly

If the reverse charge applies: The invoice should show no VAT charged. You account for the VAT yourself on your next VAT return, entering the output tax in Box 1 and reclaiming it as input tax in Box 4 (assuming full recovery). The net effect on your VAT liability is zero, but both entries must appear on the return.

If the reverse charge does not apply: The subcontractor charges VAT at the standard rate in the normal way. Process the VAT as you would any other purchase invoice, reclaiming input tax through your VAT return.

6. Pay the Correct Net Amount

Calculate the payment as the invoice total minus the CIS deduction. Using the worked figures: if the invoice shows £8,000 labour plus £2,000 materials (£10,000 net, no VAT under reverse charge), and the CIS deduction is £1,600, you pay the subcontractor £8,400. The £1,600 deduction is retained and paid to HMRC through your monthly CIS return.

Confirm the payment matches the subcontractor's expectations before releasing funds. Payment disputes are far easier to resolve before the money moves.

Scaling This Workflow Across High Invoice Volumes

Each of these steps requires extracting specific data points from every invoice: the labour and materials breakdown, CIS deduction amounts and rates, UTR numbers, VAT treatment indicators, and reverse charge status. For a contractor processing dozens or hundreds of subcontractor invoices each month, doing this manually across mixed-format documents is both time-consuming and prone to transcription errors.

Tools like Invoice Data Extraction let you automate construction invoice data extraction across batches of subcontractor invoices, pulling out the labour/materials split, deduction rates, UTR numbers, and reverse charge indicators into a structured spreadsheet ready for CIS return filing and payment processing. For a deeper look at how this fits into contractor operations, see our guide on construction invoice processing automation.

Payment processed, but the paperwork is not finished. You must still issue a Payment and Deduction Statement to the subcontractor and maintain records that satisfy HMRC's retention requirements.

Payment and Deduction Statements and CIS Record Keeping

Every time you make a payment to a subcontractor with CIS deductions applied, you have a legal obligation to issue a Payment and Deduction Statement (PDS). This document is the subcontractor's proof of deductions suffered and their basis for reclaiming those deductions against their own tax liability. Failing to provide one is a compliance breach, even if you reported everything correctly to HMRC.

What a Payment and Deduction Statement Must Include

The PDS must be provided to the subcontractor within 14 days of the end of each tax month. CIS tax months run from the 6th of one month to the 5th of the following month. So for a tax month ending 5 July, the PDS deadline is 19 July.

Each statement must contain all of the following:

Contractor's name
Contractor's employer tax reference (also called the Accounts Office reference)
Subcontractor's name
Subcontractor's Unique Taxpayer Reference (UTR)
The tax month the statement covers
Gross amount of the payment before any deductions
Cost of materials included in the gross amount (materials are excluded from the deduction calculation)
CIS deduction amount withheld
Net amount paid to the subcontractor

If you made multiple payments to the same subcontractor within a single tax month, you can issue one consolidated PDS covering all of them rather than a separate statement per payment.

CIS Monthly Returns to HMRC

Alongside issuing PDS documents to subcontractors, you must submit a CIS return to HMRC each month. This return covers all payments made to all subcontractors during the preceding tax month, including those paid gross under Gross Payment Status.

Filing deadlines are:

19th of the month for paper returns
22nd of the month for online submissions

A nil return is still required if you made no subcontractor payments during that tax month. Missing or late returns attract penalties starting at £100 per return, escalating for repeated failures.

Record Keeping Requirements

Contractors must retain CIS records for at least 3 years after the end of the tax year to which they relate. The records you need to keep include:

All subcontractor invoices received
Copies of every Payment and Deduction Statement issued
Verification records confirming each subcontractor's CIS status and deduction rate
Copies of all CIS returns submitted to HMRC
Evidence of payments made, including bank statements or payment records

HMRC can request these records during a compliance check, and gaps in your documentation will be treated as a failure to comply regardless of whether the correct deductions were actually made.

Making Tax Digital and the Shift to Quarterly Reporting

From April 2026, CIS obligations will be incorporated into Making Tax Digital for Income Tax Self Assessment (MTD ITSA). This changes the reporting cadence from monthly paper or online filing to quarterly digital submissions through MTD-compatible software. For construction businesses that currently handle CIS through manual spreadsheets or paper records, this is a significant operational shift.

The practical impact is that your record keeping must be digital from the outset, not digitised retrospectively at filing time. If your current CIS workflow relies on paper invoices filed in folders or manually typed spreadsheets, now is the time to transition. You can find full details on the upcoming requirements in our guide to Making Tax Digital for Income Tax 2026 requirements. For a broader view of what HMRC expects from digital records across your business, see our overview of HMRC digital record keeping rules for UK businesses.

CIS compliance is not a single event but a cycle of monthly obligations: verify subcontractors, apply the correct deductions, issue PDS documents within 14 days, file monthly returns by the 19th or 22nd, and retain all supporting records for at least three years. Here are the dates that matter.

Key CIS Compliance Deadlines and Practical Next Steps

Meeting CIS obligations means hitting specific deadlines consistently. Missing any of them triggers penalties that escalate quickly, so treat these dates as non-negotiable fixtures in your financial calendar.

Contractor Deadline Reference

Obligation	Deadline	Penalty for non-compliance
Subcontractor verification	Before first payment under each contract	30% higher rate deduction applied automatically
Monthly CIS return	19th (paper) or 22nd (online) of each month	£100 first month, £200 second month, £10/day after six months
Payment and Deduction Statement	Within 14 days of tax month end	Compliance breach regardless of CIS return accuracy
Record retention	Minimum 3 years after end of tax year	Treated as non-compliance during HMRC checks

Subcontractor Invoice Checklist

Before submitting any invoice for construction work, confirm it includes each of the following:

Your Unique Taxpayer Reference (UTR) printed clearly on the invoice
Labour and materials separated into distinct line items with individual totals
The applicable CIS deduction rate stated on the invoice (0%, 20%, or 30%)
The CIS deduction amount calculated and shown, so the contractor can cross-check
Reverse charge notation where the domestic reverse charge applies: state "Customer to account for VAT to HMRC" or "Reverse charge: customer to pay the VAT to HMRC," show the VAT amount for information but do not add it to the invoice total
Your CIS registration status confirmed as current with HMRC

An invoice missing any of these fields creates delays, forces the contractor to request corrections, and risks the wrong deduction rate being applied to your payment.

Practical Next Steps

1. Audit your invoice templates. Compare your current invoices, both outgoing (if you subcontract) and the templates you require from your subcontractors, against the CIS field requirements covered in this guide. Flag any missing fields and update the templates before the next billing cycle.

2. Confirm subcontractor CIS registration status. Run verification checks on every active subcontractor through HMRC's online service. Record the verification reference number and the confirmed deduction rate. For subcontractors you have not verified recently, re-verify before the next payment.

3. Assess domestic reverse charge applicability. Review each of your construction supply arrangements to determine whether the reverse charge applies. The key questions: Is the supply of construction services within scope of CIS? Is the recipient VAT-registered and not an end user? If both answers are yes, the reverse charge applies and your invoicing and VAT accounting must reflect it.

4. Prepare for Making Tax Digital for Income Tax Self Assessment (MTD ITSA). From April 2026, sole traders and landlords with qualifying income above the threshold must submit quarterly digital updates to HMRC. For construction businesses that rely on CIS deductions as part of their tax position, this means your invoicing data, deduction records, and payment statements need to flow into MTD-compatible software without manual re-entry.

Construction businesses that already capture structured, accurate data from their invoices and payment processes, where labour, materials, deduction rates, and VAT treatment are recorded cleanly at the point of entry, will move to quarterly digital reporting with minimal friction. Those still working from unstructured documents or manual spreadsheets face a significantly harder transition.