CIS in brief
Under the Construction Industry Scheme, a contractor deducts money from a subcontractor's payments and passes it to HMRC as an advance towards the subcontractor's tax and National Insurance. The rate is 20% if you're registered and the contractor can verify you, 30% if you aren't registered or can't be verified, and nothing if you have gross payment status.
CIS covers installing systems such as heating, lighting and power in buildings, but not installing dedicated security systems such as burglar alarms, CCTV and public address systems. Private householders aren't contractors. Give each contractor the exact business name and Unique Taxpayer Reference you registered with, because they verify you with HMRC before paying and a mismatch can mean the higher rate. There are grey areas: HMRC's CIS 340 guide treats repairing or extending an existing system differently from installing one, so check its Appendix A for small jobs.
What the deduction is taken from
The contractor starts from your invoice total and takes off:
- VAT
- materials you paid for yourself
- plant you hired for the job
- consumables, and fuel other than fuel for travelling
- the cost of manufacturing or prefabricating materials
The deduction applies to what's left, so in practice it comes off your labour and not your materials. Travelling expenses, including fuel, and subsistence you charge stay in the amount it comes off. If you're VAT registered, materials count at their cost without VAT; if you aren't, include the VAT you paid on them. The contractor can ask for receipts and will estimate the materials if you have none, so list materials as a separate line. They must send you a payment and deduction statement no later than 14 days after each tax month ends.
When the domestic reverse charge applies
Since 1 March 2021, most building and construction services supplied within CIS between VAT-registered businesses have fallen under the VAT domestic reverse charge. HMRC's flowchart for suppliers asks:
- Is the work within CIS?
- Is it standard or reduced rated?
- Is your customer VAT registered?
- Is your customer registered for CIS?
- Has your customer confirmed in writing that they're an end user?
Yes to the first four and no to the last means the reverse charge applies. Any other answer means normal VAT rules. You only face the question if you're VAT registered yourself.
An end user is a VAT and CIS-registered business that doesn't sell on the construction services it receives. An intermediary supplier is connected to the end user, through a corporate group or an interest in the same land such as landlord and tenant, and passes the work on without changing it. Either can tell you in writing, and you then charge VAT normally.
Householders aren't VAT registered, so you charge them VAT in the usual way. That doesn't make you an end user: if you're the main contractor on a domestic job, VAT-registered subcontractors working for you should still apply the reverse charge if the rest of the conditions apply. Materials you supply as part of the job are reverse charged along with the labour. Labour-only subcontractors are covered, but employment businesses supplying staff aren't.
What the invoice must show
- Everything a normal VAT invoice needs.
- A note that the reverse charge applies and the customer must account for the VAT. The VAT Regulations 1995 require a reference to the reverse charge, and HMRC's example wordings include ‘Customer to pay the VAT to HMRC’ and ‘S55A VATA 94 applies’. ‘Reverse charge: customer to pay the VAT to HMRC’ does both jobs.
- The amount of VAT due under the reverse charge, or the rate if you can't show the amount, without adding it to the total.
Worked example
You're a VAT-registered electrician, registered for CIS at 20%. A VAT and CIS-registered contractor refitting a shop asks you to rewire it and hasn't given you an end user notice. Your labour is £1,800 and the materials you bought cost £700 before VAT.
| Invoice and payment | Amount |
|---|---|
| Labour: rewire of shop unit | £1,800.00 |
| Materials supplied | £700.00 |
| Net total | £2,500.00 |
| VAT at 20%, shown but not charged. ‘Reverse charge: customer to pay the VAT to HMRC’ | £500.00 |
| Invoice total | £2,500.00 |
| CIS deduction the contractor makes: 20% of £1,800 labour | −£360.00 |
| Payment you receive | £2,140.00 |
Your returns. Include £2,500 in box 6 of your VAT Return, with no output VAT for this sale. The £360 appears on the contractor's statement and counts towards your tax: sole traders claim it on their Self Assessment return, and limited companies through their payroll submissions to HMRC.
The contractor's returns. They add £500 to box 1, reclaim £500 in box 4 under the normal rules and include £2,500 in box 7. Their CIS monthly return shows a payment of £2,500, materials of £700 and a deduction of £360, which they pay to HMRC.
If the customer were an end user who had told you so in writing, you would charge VAT normally: £2,500 plus £500 VAT makes £3,000. The CIS deduction stays at £360, because it ignores VAT and materials, so you would receive £2,640.
Watch out for
- Reverse charge supplies can't go through the Cash Accounting Scheme, and Flat Rate Scheme users leave them out of their flat rate calculation.
- With no VAT coming in on reverse charge work, you may end up reclaiming more than you pay. HMRC lets you apply to move to monthly returns.
- Don't split labour and materials into separate invoices or linked contracts to keep materials out of the reverse charge.
- If a customer's status changes during a contract, they must tell you, and the VAT treatment changes from that point.