Money

CIS on Materials: The Markup Trap Every Subcontractor Should Know

BuilderBuddy · 10 August 2026 · 9 min read

Here is advice you'll find on every trade site going, including the pricing guides written by people who sell software to tradesmen: mark your materials up 15% to 25%. It covers your time sourcing them, the diesel, the waste, the risk of getting the spec wrong.

It's good advice. It is also, the moment you're working as a subcontractor under CIS, quietly costing you money at source, and almost nobody spells out why.

The short version: CIS is deducted from your labour, not your materials, but HMRC only lets the actual cost you paid come out of the sum. Every pound of markup you add on top is treated as labour, and taxed like labour, before the money ever reaches your account.

First: Does CIS Even Apply to You?

Worth two minutes, because a lot of tradespeople worry about CIS when it has nothing to do with them.

CIS applies when a contractor pays a subcontractor for construction work. HMRC's own guidance (CIS 340, section 2.3) is blunt about who isn't a contractor: ordinary householders having work done on their own premises are not contractors.

So if you fit a bathroom for Mrs Patel and Mrs Patel pays you, that's outside CIS entirely. She pays your invoice in full. No deductions, no verification, nothing to file.

The moment you're on someone else's job, though, being paid by a builder or a main contractor rather than the homeowner, you're a subcontractor and the money gets held back. Most sole traders do both in the same month without really registering the difference.

The Rates, and What They Come Off

There are three CIS rates, and the contractor confirms which by verifying you with HMRC:

20% if you're registered for CIS. 30% if you're not, which is HMRC's way of making registration worth your while. 0% if you hold gross payment status and get paid in full.

The important part is what the percentage is applied to. It is not your invoice total. CIS comes off the payment excluding VAT and excluding the cost of materials. That's the whole reason how you write an invoice matters.

The Trap: Your Markup Counts as Labour

HMRC's rule is that only materials the subcontractor directly paid for, to fulfil that contract, can be taken out of the sum. CIS 340 section 3.13 also puts the onus on the contractor to check the materials figure isn't overstated, and to keep records proving it.

Which means the markup isn't a materials cost. It's your margin, and margin is treated exactly like labour income. Here's the same job three ways.

1. 1
   You itemise properly: deduction £272Materials cost you £800 at the merchant. You charge £960 for them (a 20% markup) and £1,200 labour, so £2,160 in total. Only the £800 you actually paid comes out. CIS applies to £1,360, being £1,200 labour plus £160 of markup. At 20%, that's £272 held back.
2. 2
   What most people assume: £240The natural assumption is that the whole £960 materials line is exempt, giving a deduction of £240 on the £1,200 labour. It isn't, and the £32 difference is the markup being taxed. Small on one job. Not small across a year of them.
3. 3
   You send one lump sum: £432Invoice says "Supply and fit, £2,160" with no split. The contractor has nothing to work from, so CIS comes off the lot. That's £432, and you've just had 20% deducted on £800 of materials you paid for out of your own pocket weeks ago.

The gap between the best and worst version of that invoice is £160, on one modest job, for no reason other than how the paperwork was written.

What Counts as Materials, and What Doesn't

This is where people lose money without realising, because the definition is narrower than it sounds.

Counts: the genuine cost of materials you bought for that job. Cable, copper, timber, plasterboard, adhesive, fixings, the units and the worktop. Consumables used up on the job. Plant hire and equipment you've had to hire in for it.

Doesn't count: your markup, as above. Fuel for getting yourself to and from site, which is a travel cost, not a material. Your own time spent sourcing and collecting. And in practice, anything you can't evidence with a purchase invoice, because the contractor is the one who gets asked to prove it.

Stock off your own van is a grey area worth raising with your accountant rather than guessing at. If you bought it months ago for general use rather than for this contract, the "directly paid for, to fulfil this contract" test gets shaky.

The Honest Bit: It's Cash Flow, Not Extra Tax

Plenty of guides let you believe CIS deductions are money gone. They're not. Every pound deducted is an advance payment against your Income Tax and National Insurance. It shows up on your Self Assessment, and if too much was taken, and for most subcontractors too much is taken, you get it back.

So the real cost of a badly written invoice isn't a permanent tax loss. It's your money sitting in HMRC's account instead of yours, sometimes for the best part of a year, while you cover the merchant bill and the van and the diesel out of what's left.

For a sole trader running on the float between paying for materials and getting paid for the job, that timing gap is the whole ball game. Which is why the invoice is worth getting right even though the money "comes back eventually."

How to Invoice So You're Not Overcharged

None of this needs an accountant. It needs the labour and the materials on separate lines, and the materials priced honestly.

1. 1
   Split labour and materials on every CIS invoiceTwo clearly labelled sections with their own totals. Never one "supply and fit" figure. If the contractor can't see the split, they're entitled to deduct from everything.
2. 2
   Show materials at what you actually paidList the real cost from the merchant. If you're marking up, put the markup where it belongs, in your labour or as a separate handling line. Inflating the materials figure to dodge the deduction is the thing HMRC asks contractors to check for, and it's their liability if it's wrong, so they will check.
3. 3
   Keep the purchase invoicesThe contractor may have to evidence your materials figure. Being the subbie whose receipts are always to hand is a cheap way to be the subbie who gets called first.
4. 4
   Put your UTR and CIS status on itIt saves a phone call, and it stops you being verified as unregistered and taxed at 30% when you're entitled to 20%.
5. 5
   Keep every payment and deduction statementThe contractor must give you one. It's your proof of tax already paid when you file, and the difference between reclaiming what you're owed and losing it.

What Changed in April 2026

A few things came in on 6 April 2026 that are worth knowing, particularly if you take anyone on yourself.

Monthly returns are now compulsory even when you've paid nobody. If you're the contractor, you file a nil return by the 19th of the month or tell HMRC in advance that no payments are coming. This catches out the tradesman who used a subbie once in June and forgot the scheme keeps running.

The late-filing penalties are back with teeth. £100 the day you're late, £200 at two months, then £300 or 5% of the deductions at six and twelve months, and beyond that up to £3,000 or 100% of the deductions. On a nil return with nothing to declare.

Gross payment status can now be pulled on the spot. Where HMRC believes a business knew, or should have known, it was part of a supply chain involving fraud, it can remove gross status immediately, assess the tax and add a penalty of up to 30%. The wait before you can reapply has gone from one year to five. If you hold gross status, that is a serious reason to care who you work for.

Public bodies are out. Payments to local authorities and certain public sector bodies now sit outside CIS altogether.

The Bottom Line

Working direct for homeowners, CIS doesn't touch you. Working for another builder, 20% of your labour goes to HMRC before you see it, and that's fine, it's your tax paid early.

What isn't fine is handing over 20% of your materials as well because the invoice said "supply and fit". Split the lines, price the materials at cost, put the margin where it belongs, and keep the receipts. It's ten minutes of paperwork discipline that keeps hundreds of pounds a year in your account rather than HMRC's until next January.