Deciding whether you should receive gross or net payments
When HMRC register you as a subcontractor they'll automatically set you up to receive payments 'under deduction'. This means contractors must make a deduction at 20 per cent from most of the value of your invoices and pay it over to HMRC. The deduction is held on account of your eventual tax and National Insurance contributions liability. But contractors won't make a deduction from amounts you charge on your invoice for:
• VAT
• Construction Industry Training Board levy
• materials
• consumable stores
• plant hire
• manufacturing or prefabricating materials
If you don't want to have any deductions from your payments you'll need to prove you're eligible. If you can show HMRC your business passes some qualifying tests, they will grant you gross payment status.
If you don't register with HMRC as a subcontractor you'll have higher deductions made from your payments. Contractors will deduct 30 per cent from your invoices. HMRC will put these deductions against your tax bill for the year if you do later register with them and report your income on a tax return.
http://www.hmrc.gov.uk/cis/subcontractors/reg-obs.htm