The short answer
CIS (the Construction Industry Scheme) requires a contractor to deduct tax from a subcontractor's labour before paying an invoice, and the subcontractor's invoice needs to show that deduction clearly, not just the final amount paid. Both Xero and QuickBooks can calculate and show the deduction automatically once CIS is switched on and your registration details are entered correctly, so you stop working it out by hand on every invoice and risking a dispute over the figure. The setup is mostly a one-off job in settings you already have access to, then every invoice after that calculates itself.
What CIS does to a subcontractor invoice, in one paragraph
Under CIS, a contractor paying a subcontractor for construction work deducts a percentage of the labour element of the invoice and pays it to HMRC on the subcontractor's behalf, as an advance against the subcontractor's own tax bill. Materials aren't deducted from, only labour, which is why an invoice that mixes the two needs the split shown clearly. The deduction rate depends on whether the subcontractor is registered with HMRC for CIS and verified by the contractor, and the exact current rates and thresholds are set by HMRC and do change, so always check gov.uk's CIS pages rather than relying on a fixed percentage quoted anywhere else, including here.
Setting it up correctly in Xero
Xero has a dedicated CIS feature that needs switching on in your financial settings before it does anything. Once enabled, you register your business as a contractor, subcontractor, or both, and enter each subcontractor's verification details as supplied by HMRC. From that point, raising an invoice to or from a CIS contact automatically splits labour and materials, calculates the deduction on the labour portion, and shows it as a separate line, so the figure on the invoice always matches what actually gets paid. Xero also keeps a CIS report you can hand to your accountant at year end, rather than reconstructing deductions from a spreadsheet afterwards.
Setting it up correctly in QuickBooks
QuickBooks handles CIS similarly: there's a CIS setting to turn on in account settings, after which your contacts can be marked as CIS contractors or subcontractors with their verification status recorded. Invoices to a marked contact then show the deduction automatically, split from materials, and QuickBooks keeps its own CIS summary reports for your return. The main practical difference from Xero is in the exact settings menu wording rather than what it actually does, both calculate correctly once the subcontractor's details are entered and verified properly at the start.
A worked example (illustrative figures only)
To see why the split matters: imagine an invoice for £10,000 made up of £8,000 labour and £2,000 materials, with the subcontractor registered and verified under CIS at the standard deduction rate. The deduction applies only to the £8,000 labour element, not the materials, and not VAT if the invoice carries it. Whatever the current standard rate is (check gov.uk, it's reviewed and can change), multiplying it against the labour figure alone, rather than the full £10,000, gives the correct deduction. Getting the labour/materials split wrong on the invoice itself is the single most common cause of a CIS dispute between contractor and subcontractor, far more often than the rate itself being in question.
Why reminder timing needs to differ on commercial and CIS work
A reminder sequence that works well for a domestic customer, a friendly nudge at seven days, firmer at fourteen, doesn't fit most commercial and CIS invoices, because main contractors commonly work to 30, 60 or even 90-day payment terms that are agreed upfront rather than a sign of late payment. Automating CIS invoicing properly means setting a separate reminder schedule for commercial work that matches the actual agreed terms, so a reminder lands when the invoice is genuinely overdue rather than firing early against terms you accepted when you took the job. Treating every invoice on the same clock is a common reason automated reminders get switched off again after causing an unnecessary awkward conversation with a contractor who was paying exactly on time.
What to check before going live
Before switching CIS on and trusting it fully, verify a subcontractor's CIS status with HMRC yourself rather than taking their word for it, both Xero and QuickBooks support this verification step and it affects which deduction rate applies. Run a handful of real past invoices through the new setup and check the figures match what you'd have calculated by hand, before relying on it for invoices going out to contractors who will query a wrong number immediately. And keep the labour/materials split genuinely accurate on the quote stage too, not just the invoice, so there's no renegotiation needed later over what counts as which.
When to get help, and what we'd do
If you're doing CIS invoicing by hand now, working out each deduction manually and keeping your own running total for your accountant, that's exactly the kind of repetitive, error-prone task automation removes cleanly. We'd set up quote and invoice automation through Xero or QuickBooks with CIS handled correctly from the first invoice, a separate reminder schedule for commercial and CIS work versus domestic jobs, and your subcontractor or contractor details verified and entered properly at the start rather than worked around later. For a firm doing a genuine mix of domestic and subcontract work, this usually gets scoped alongside the rest of your invoicing setup in one project rather than as an isolated fix.
See the wider picture on chasing unpaid invoices as a trade business, and read automating quotes and invoices with Xero or QuickBooks for the general version of this setup. For the wider rules around Making Tax Digital and compatible software, see our guide to Making Tax Digital.
Frequently asked questions
Does CIS apply to all construction work?
Broadly yes for work falling under the scheme's definition of construction operations, but there are specific exceptions, and whether a particular job counts is worth checking against HMRC's own guidance rather than assuming either way, since getting this wrong in either direction causes problems at year end.
What happens if I get the labour and materials split wrong on an invoice?
The deduction gets calculated against the wrong figure, which usually means a dispute with the contractor once they or their accountant spot it, and a correction that takes longer to sort out than getting it right the first time would have. Being precise about the split at quote stage avoids most of this.
Do I need to verify every subcontractor myself?
Yes, as the contractor you're responsible for verifying a subcontractor's CIS status with HMRC before applying a deduction rate, rather than relying on what they tell you. Both Xero and QuickBooks support this verification step directly.
Can automated reminders cause problems on CIS invoices with long payment terms?
Only if the reminder schedule doesn't reflect the agreed terms. Once it's set up to match 30, 60 or 90-day terms rather than the shorter domestic default, reminders land when an invoice is genuinely overdue, not before.
Will switching on CIS in Xero or QuickBooks affect invoices I've already sent?
No, it applies to invoices raised after it's switched on and configured. Existing invoices keep whatever figures they were raised with, which is why it's worth setting CIS up correctly before the next invoicing run rather than partway through one.