If you work in construction for other businesses, two sets of HMRC rules affect your invoices: the Construction Industry Scheme (CIS), which is about income tax deductions, and the VAT domestic reverse charge, which is about who pays the VAT. They are separate rules, but they often apply to the same invoice, which is where the confusion starts.
Part 1: the Construction Industry Scheme
Who CIS applies to
CIS applies to payments made by contractors to subcontractors for construction work in the UK. A contractor is a business that pays subcontractors for construction work. Some businesses that are not construction firms, but spend a lot on construction, also count as contractors.
Construction work is broad: building, alterations, repairs, decorating, demolition, site preparation, and installing heating, lighting, power, water and drainage systems. Some work is outside the scheme, such as installing security systems or carpets, and architecture or surveying.
Work for a homeowner on their own home is not covered by CIS, so domestic customers do not make deductions.
How the deductions work
When a contractor pays a subcontractor, they deduct money from the labour part of the payment and pass it to HMRC as an advance on the subcontractor's tax and National Insurance.
| Subcontractor status | Deduction from labour |
|---|---|
| Registered for CIS | 20% |
| Not registered | 30% |
| Gross payment status | 0% |
Deductions apply to labour only. They do not apply to the cost of materials the subcontractor bought for the job, or to VAT. That is why it matters to show materials separately on your invoice.
A CIS worked example
An electrician registered for CIS invoices a contractor for £2,000 of labour and £500 of materials, and is not VAT registered.
| Line | Amount |
|---|---|
| Labour | £2,000.00 |
| Materials | £500.00 |
| Total | £2,500.00 |
| Less CIS deduction (20% of £2,000) | -£400.00 |
| Amount payable | £2,100.00 |
The contractor pays £2,100 and sends a payment and deduction statement showing the £400 deducted. The electrician claims that £400 back against their tax bill through their Self Assessment return.
Registering and keeping records
Subcontractors can register for CIS with HMRC to get the 20% rate instead of 30%. Keep every payment and deduction statement your contractors send, because you need them to claim the deductions. If you are a limited company, deductions are reclaimed through your payroll rather than Self Assessment.
Part 2: the VAT domestic reverse charge
What it is
Since March 2021, for many construction services supplied between VAT-registered businesses, the customer accounts for the VAT to HMRC instead of the supplier charging it. The supplier issues an invoice that shows the VAT due but does not collect it. This is the domestic reverse charge for building and construction services.
When it applies
Broadly, it applies when all of these are true:
- you are VAT registered
- you supply standard or reduced-rated construction services that fall under CIS
- your customer is VAT registered and registered for CIS
- your customer is not an end user or an intermediary supplier
An end user is a business that is not going to sell your services on as part of a construction service, for example a shop owner having their own premises refurbished. End users should tell you in writing that they are an end user, and then normal VAT applies.
There is also a rule for small amounts of reverse charge work within a larger supply. If the reverse charge services are 5% or less of the total value, normal VAT may be charged on the whole invoice. This is often called the 5% disregard.
What the invoice must say
A reverse charge invoice should make it clear that the reverse charge applies and that the customer must account for the VAT. HMRC's guidance gives example wording such as "Reverse charge: customer to pay the VAT to HMRC". The invoice should still show the VAT rate and the amount of VAT that the customer must account for, but this amount is not added to the total you are asking them to pay.
Reverse charge and CIS on the same invoice
Back to our electrician, now VAT registered and working for a VAT and CIS-registered contractor who is not an end user.
| Line | Amount |
|---|---|
| Labour | £2,000.00 |
| Materials | £500.00 |
| Net total | £2,500.00 |
| VAT at 20% (£500) to be accounted for by the customer | not charged |
| Less CIS deduction (20% of labour) | -£400.00 |
| Amount payable | £2,100.00 |
The contractor pays £2,100. They account for the £500 of VAT on their own VAT return, and usually reclaim it as input tax at the same time, so the net effect for them is often nil.
The cash flow effect for subcontractors
Before the reverse charge, a VAT-registered subcontractor would collect VAT from the contractor and hold it until their VAT return was due. Now they do not collect it, so they lose that cash flow buffer. On the other hand, they still reclaim VAT on their materials and van costs, which can mean regular VAT repayments. Some subcontractors switch to monthly VAT returns to get repayments sooner. Ask your accountant whether that suits you.
Common mistakes
- Applying the reverse charge to homeowners. It never applies to domestic customers. Charge normal VAT.
- Applying it to end users who have told you in writing that they are end users.
- Deducting CIS from materials. Deductions apply to labour only.
- Not checking your customer. Check their VAT number and CIS status before the first invoice, and keep a note of it.
- Wrong wording. An invoice that adds VAT to the total when the reverse charge applies will confuse your customer and their accountant.
How Cuppaflow handles it
Cuppaflow invoices support CIS deductions and domestic reverse charge VAT, with labour and materials on separate lines, the reverse charge wording and the amount payable worked out for you. The VAT summary and CSV exports give your accountant what they need. You still decide when each rule applies, so check GOV.UK when you are unsure.
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