CIS Deduction Rules & Rates: What Every Contractor Must Know

Why CIS Deductions Are a Minefield

Under the Construction Industry Scheme (CIS), contractors must deduct tax from payments made to subcontractors. These deductions are not optional — they are a legal requirement, designed to stop tax evasion in construction.

But applying the wrong rate, deducting from the wrong cost element, or misunderstanding what qualifies can create serious problems. HMRC will hold the contractor responsible for mistakes, even if the subcontractor supplied incorrect details.

This guide breaks down CIS deduction rules for 2025/26, highlights common traps, and shows how Wexley & Associates keeps contractors compliant.

CIS Deduction Rates for 2025/26

Once a subcontractor is verified, HMRC assigns them a deduction status:

• 20% (Standard Rate) → for most registered subcontractors.

• 30% (Higher Rate) → if the subcontractor is not verified, or has compliance issues.

• 0% (Gross Payment Status, GPS) → for subcontractors who meet strict HMRC turnover and compliance conditions.

👉 Deducting at the wrong rate is one of the fastest ways to attract HMRC scrutiny.

🔗 HMRC: CIS Deduction Rates

What Deductions Apply To

Under CIS, deductions are made only on the labour element of the subcontractor’s invoice. Contractors must exclude:

• VAT charged by the subcontractor.

• Materials the subcontractor paid for directly.

• Plant hire and equipment costs (if paid by the subcontractor).

• Travel and subsistence costs (if charged separately).

Failing to strip out these amounts means over-deducting — creating disputes, refund delays, and unnecessary admin.

Common Deduction Pitfalls

Contractors frequently lose money or face penalties by:

• Deducting on VAT or materials when they shouldn’t.

• Failing to get proper records of direct material costs.

• Applying 30% by default when subcontractors should have been verified.

• Forgetting to re-check subcontractor GPS status.

Each of these errors can damage subcontractor relationships, create HMRC exposure, and even trigger an inspection.

Penalties & HMRC Enforcement

HMRC enforces deduction rules strictly. Risks include:

• Fines for incorrect CIS returns.

• Penalties for underpayments caused by wrong rates.

• Interest charges on late or inaccurate deductions.

👉 Contractors are ultimately responsible — not subcontractors. HMRC makes this clear in its CIS 340 guidance.

🔗 HMRC: CIS 340 – Guide for Contractors & Subcontractors

How Wexley Protects Contractors

At Wexley & Associates, we ensure deductions are applied correctly, so clients avoid disputes and HMRC penalties. Our services include:

• Checking subcontractor verification status and ensuring the right rate is applied.

• Reviewing invoices to separate labour from non-labour elements.

• Managing CIS returns so deductions match HMRC’s requirements.

• Advising subcontractors on maintaining Gross Payment Status to keep their cash flow strong.

By handling deductions properly, we safeguard your compliance and free your business from unnecessary risk.

Protect Your Business from CIS Deduction Errors

CIS deductions are not straightforward — one slip can mean overpayments, angry subcontractors, or HMRC fines. The safest move is to let experts manage the process.

👉 Contact Wexley & Associates today to keep your CIS deductions accurate, compliant, and stress-free.

References

• HMRC: CIS 340 – Construction Industry Scheme: Guide for Contractors and Subcontractors

• HMRC: CIS Deduction Rates

• Related Wex Insider article: Verifying Subcontractors Under CIS: What Contractors Must Know