Construction business expenses in the UK: CIS, the VAT reverse charge, and what you can claim

Construction is the one UK sector with its own tax-deduction machinery sitting on top of normal expense rules. Before a subcontractor thinks about tools, vans, or materials, the Construction Industry Scheme (CIS) and the VAT domestic reverse charge have already changed how cash moves and how books must be kept. Get those two right and the rest of construction expense accounting is ordinary. All figures below are sourced from HMRC guidance in the Sources section.

CIS: the deduction that happens before you claim anything

Under the Construction Industry Scheme, a contractor must deduct money from a subcontractor’s payment and pass it to HMRC as an advance towards that subcontractor’s tax and National Insurance ^[1] . The rate depends on the subcontractor’s status:

The detail that trips up new firms: the deduction is taken only from the labour part of the payment, not from the cost of materials the subcontractor actually incurred ^[1] . A £5,000 invoice that is £3,000 labour and £2,000 materials suffers a 20% deduction on the £3,000 only, so £600 goes to HMRC and £4,400 is paid. That makes a clean labour-versus-materials split on every invoice a bookkeeping necessity, not a nicety.

The VAT domestic reverse charge

Since March 2021, most business-to-business construction services covered by CIS fall under the VAT domestic reverse charge. The supplier issues an invoice showing no VAT, states that the reverse charge applies, and the customer accounts for both the output and input VAT on their own return ^[3] .

It applies only when the supplier and customer are both VAT registered, the service is reported under CIS, and the customer is not an end user ^[3] . It does not apply to work for private domestic customers, or where an end user has told the supplier in writing that they are the end user. The practical effect for subcontractors is a cash-flow change: invoices stop carrying the 20% VAT that used to land in the bank before the VAT bill was due.

Tools, protective clothing, and workwear

The everyday deductions are straightforward once CIS is handled. Hand tools, power tools, and consumables used wholly for the business are allowable. Protective clothing and safety equipment (boots, hi-vis, hard hats, gloves) are deductible because they are needed for the work, whereas ordinary clothing worn under them is not. Branded workwear and uniforms are allowable. Keep the receipt against each purchase so the labour-versus-materials and the allowable-versus-private lines are both evidenced.

Plant, machinery, and capital allowances

Bigger purchases (excavators, scaffolding, generators, a work van) are capital, so they go through capital allowances rather than being expensed line by line. The Annual Investment Allowance (AIA) gives 100% relief on qualifying plant and machinery up to £1 million of spend a year, which covers almost everything a small construction firm buys ^[4] .

Cars are the exception: they sit outside the AIA and attract writing-down allowances based on CO2 emissions, which is one reason vans and pickups are treated more favourably than cars for a construction business.

Vehicles and travel

A van used for the business runs on actual costs (fuel, insurance, repairs, road tax) apportioned for any private use, or you can use HMRC’s simplified mileage rate. Travel between a permanent workplace and home is not deductible, but travel to temporary sites usually is. The rules and rates are covered in the claim mileage in the UK and claim travel in the UK guides.

Where ExpenseFlow fits

The construction-specific load is documentary: every payment needs its labour/materials split for CIS, its VAT treatment confirmed for the reverse charge, and its receipt retained for the six-year record-keeping window. ExpenseFlow captures each receipt and supplier invoice, extracts the line detail, and syncs the transaction into Xero or QuickBooks Online with the source image attached. Its compliance checks flag construction-service lines still sitting at standard 20% VAT that may belong on the domestic reverse charge, so the treatment is caught at capture rather than at the VAT return. It surfaces the numbers a contractor needs to file CIS and VAT returns accurately; it does not file the returns or verify subcontractor status for you, but it removes the receipt-chasing that makes month-end on a busy site painful.

Common mistakes

• Applying the CIS deduction to the whole invoice instead of the labour element only ^[1] .
• Charging 20% VAT on a job that should be reverse-charged, or vice versa, because end-user status was never confirmed in writing ^[3] .
• Treating a van purchase as a running cost rather than a capital allowance claim, and missing the AIA ^[4] .
• Losing the materials receipts that justify the gross-paid portion of a CIS invoice in an HMRC check.