How does CIS work under Making Tax Digital?

If you subcontract to builders, there is one number that decides whether Making Tax Digital catches you, and it is not the number that lands in your bank. Getting this backwards is the most expensive misunderstanding available to a CIS subcontractor right now, because it can convince you that you are outside the rules when you are firmly inside them.

This guide is about the intersection of the two schemes. Whether your work is inside CIS at all is a separate question with a surprisingly sharp answer, and our guide on CIS for gas engineers deals with it: installing a heating system is within the scheme, replacing a boiler in an existing system is not.

The trap: gross invoice, not net payment

Qualifying income for Making Tax Digital is your total income from self-employment and property before any expenses are deducted. HMRC also calls it turnover. A CIS deduction is taken by the contractor after that figure exists, so it plays no part in it.

Work the numbers. You invoice contractors £40,000 across the year for labour, and 20% is deducted at source as a registered subcontractor. £32,000 reaches your account. Your qualifying income is £40,000, not £32,000. Against the £30,000 threshold that applies from April 2027, £32,000 and £40,000 both put you in, but the same arithmetic at lower volumes decides it: invoice £31,000 gross and take home £24,800, and you are caught by a threshold your bank statement says you are nowhere near.

Why a deduction is not an expense

It is tempting to treat the money the contractor kept as a cost of doing business. It is not. A CIS deduction is an advance payment towards your income tax and National Insurance, held by HMRC against your eventual bill. The work you did was worth the gross amount; part of your tax was simply paid early, by someone else, on your behalf.

That distinction decides where the figure belongs. A quarterly update carries totals for the income and expense categories of your trade. A payment towards your personal tax bill is not a trading expense, so it does not sit in those totals and it does not reduce the income you report. Deductions suffered are reported separately from the quarterly update and set against your final bill, which is where any refund appears.

Put the deduction in as an expense and you understate your profit by the full amount, then claim credit for the same money again at the end of the year. It is a double count, and it is the kind of error that surfaces at exactly the wrong moment.

Why the materials split matters more than ever

The contractor does not apply the deduction rate to your whole invoice. VAT, the materials you paid for, plant hire, fuel used on the job and consumables all come out first, and the rate runs on what is left, which is essentially your labour. Materials priced separately are materials that are not deducted from.

Under Making Tax Digital that split stops being good practice and becomes bookkeeping infrastructure. Your digital records have to carry each transaction with its amount, date and category anyway, so an invoice that already separates labour from materials is feeding both systems at once: the contractor's deduction calculation and your own quarterly totals. An invoice that lumps everything into one line makes both harder, and invites a deduction on materials you paid for out of your own pocket.

Subcontractors are the group most likely to be owed money

Because deductions are taken from labour before expenses are considered, a subcontractor with real costs (van, tools, materials, workwear, mileage) frequently has more tax paid in advance than the year eventually demands. That is why CIS refunds are common rather than exceptional.

The practical consequence of Making Tax Digital here is timing. Reporting quarterly means the picture builds through the year instead of arriving in January, so an overpayment is visible months earlier than it used to be. That only works if the deductions are recorded as they happen. A deduction statement filed in the van door pocket is a refund you have not claimed yet.

What to keep, and keep hold of

• The payment and deduction statement from every contractor, for every payment. This is your evidence for the deductions suffered.
• Your invoices with labour and materials separated, so the deduction base is demonstrable.
• Digital records of each transaction with amount, date and category, as Making Tax Digital requires regardless of CIS.
• Your CIS registration status, because the difference between registered and unregistered is 20% against 30% at source.