CIS Expenses Explained: How to Treat Materials, Travel and VAT Correctly

If you work in the construction industry, you've probably come across invoices that look something like this:

• Labour: £2,000

• Materials: £500

• Fuel: £100

• Hotel: £150

• Parking: £20

At first glance, it all seems fairly straightforward. When it comes to the Construction Industry Scheme (CIS), not everything on that invoice is treated in the same way. Throw VAT into the mix, and it's easy to see why so many contractors and subcontractors get confused.

One of the most common questions we're asked is: "Do I deduct CIS from expenses?"

Like many things in bookkeeping, the answer is... "It depends what the expense actually is."

A quick reminder – how does CIS work?

Under the Construction Industry Scheme (CIS), contractors deduct tax from payments made to subcontractors for construction work and pay those deductions over to HMRC. The deduction is made from the labour element of the invoice. Not everything on an invoice is treated as labour, which is why separating costs correctly is so important.

Labour vs materials. The biggest distinction

This is the area that causes the most confusion. Generally speaking, labour is subject to CIS deductions while the direct cost of materials is not. That means if a subcontractor purchases materials specifically for your job and includes them separately on their invoice, the contractor can normally deduct the cost of those materials before calculating the CIS deduction.

Example

A subcontractor invoices:

• Labour: £2,000

• Materials: £500

Subtotal: £2,500

VAT: £500

Total invoice: £3,000

CIS is calculated on the labour only, not the materials. If the subcontractor is registered for the standard 20% deduction:

• CIS applies to £2,000

• Materials are excluded

• VAT is also excluded from the CIS calculation

This is why separating labour and materials clearly on invoices is so important.

Why evidence matters

It's not enough for an invoice to simply say "Materials – £1,500."

Contractors should be satisfied that those costs genuinely relate to materials supplied for the contract. In many cases, it's sensible to ask for supporting invoices or receipts, particularly where material costs are significant. Good records protect everyone if HMRC ever asks questions.

What about travel expenses?

Travel is where things become a little more interesting. Unlike materials, travel costs don't automatically fall outside CIS simply because they're listed as an expense. If a subcontractor incurs travel costs while carrying out work and recharges those costs to the contractor, they're generally considered part of the overall payment for the work. That means they're normally included when calculating the CIS deduction.

Example

Invoice:

• Labour: £1,500

• Mileage: £120

CIS is generally calculated on £1,620, because the mileage isn't treated in the same way as materials. Many people assume that because it's labelled "expenses", CIS doesn't apply. Unfortunately, HMRC doesn't look at the heading, it looks at the nature of the payment.

Hotels and overnight accommodation

The same principle usually applies. If a subcontractor books and pays for a hotel while working away from home and then recharges that cost to the contractor, it's generally treated as part of the payment under the contract. That means it's usually included in the amount subject to CIS. However, if the contractor books and pays the hotel directly, no reimbursement is being made to the subcontractor, so there is no amount to include on their invoice. It's a small distinction, but an important one.

Meals while working away

Meals often cause confusion too. If a subcontractor buys lunch while working on site, that's generally their own business expense. If they recharge the cost to the contractor as part of their invoice, it will usually be treated in the same way as other reimbursed expenses for CIS purposes.

Again, it's very different from the direct cost of materials.

Fuel, parking and tolls

These are all common costs in the construction industry. If they're simply reimbursed through the subcontractor's invoice, they're generally treated as part of the overall payment and are usually included when calculating the CIS deduction. Parking tickets and toll charges might feel separate from the work itself, but if they're recharged through the invoice, they normally follow the same CIS treatment.

Plant hire, tools and PPE

These can be a little more nuanced. If the subcontractor supplies plant or equipment as part of carrying out the contract, the treatment will depend on the nature of the supply and the contractual arrangements. Similarly, PPE and tools purchased by the subcontractor for their own use are generally part of running their business rather than materials supplied to the contractor. If you're ever unsure, it's worth taking advice before assuming these items can be excluded from the CIS calculation.

What about VAT?

VAT is another area where misunderstandings are common. If the subcontractor is VAT registered and charges VAT on their invoice, the contractor may be able to reclaim that VAT in the normal way, provided they have a valid VAT invoice and the expense relates to their business.

Importantly, VAT is not included when calculating the CIS deduction.

Going back to our earlier example:

• Labour: £2,000

• Materials: £500

• VAT: £500

CIS is calculated on the labour only. The VAT sits outside that calculation.

Who should pay the supplier?

Sometimes it's worth asking whether the subcontractor should be paying the expense at all. For larger items such as hotels, specialist equipment or expensive materials, it may make more sense for the contractor to arrange and pay the supplier directly.

Doing so can:

• Simplify the paperwork

• Avoid unnecessary reimbursements

• Make VAT recovery more straightforward

• Reduce confusion around CIS calculations

Every situation is different, but it's worth considering before simply adding expenses onto an invoice.

Common mistakes we see with CIS expenses

❌ Applying CIS to materials

Where genuine material costs are separately identified, they can usually be excluded from the CIS calculation.

❌ Not applying CIS to travel or accommodation

Unlike materials, many reimbursed expenses remain subject to CIS.

❌ Mixing labour and materials together

An invoice that simply says "Works completed £3,000" leaves everyone guessing. Clear breakdowns help both the contractor and the subcontractor.

❌ Keeping poor records

Receipts, invoices and supporting documentation are invaluable if questions arise later.

❌ Reclaiming VAT without a valid VAT invoice

Remember, proof of payment isn't the same as a VAT invoice. (If you missed our recent blog on VAT invoices, it's well worth a read!)

Final thoughts

The word "expenses" can sometimes make people think every reimbursed cost is treated the same under CIS. It isn't! Materials have their own rules. Travel and accommodation have different rules. VAT has another set of rules again. Getting those distinctions right helps contractors calculate deductions correctly, helps subcontractors understand what they're being paid, and reduces the likelihood of awkward conversations with HMRC later.

As with many areas of bookkeeping, good records and clear invoices are half the battle. If you're ever unsure whether something should be included in the CIS calculation, it's always better to ask before the payment is made than to untangle it afterwards.