CIS and the VAT Domestic Reverse Charge Explained

Two HMRC regimes affect most payments between contractors and subcontractors in UK construction: the Construction Industry Scheme (CIS), which deals with income tax deductions, and the VAT domestic reverse charge for building and construction services, which changes who accounts for VAT. They are separate, but the reverse charge depends on whether a payment is reported under CIS.

The Construction Industry Scheme in brief

Under CIS, contractors deduct money from payments to subcontractors and pass it to HMRC as advance payments towards the subcontractor's tax and National Insurance. HMRC's guide CIS 340 sets out the rules.

Verification: contractors must verify new subcontractors with HMRC before paying them. HMRC tells the contractor which rate to use.
Rates: 20% for registered subcontractors, 30% for subcontractors who are not registered, and 0% where the subcontractor has gross payment status.
What the deduction applies to: the payment less the cost of materials, VAT and certain other items. Deductions are not made from the cost of materials the subcontractor supplies.
Monthly returns: contractors file a return for each tax month (the 6th of one month to the 5th of the next) by the 19th, and pay deductions by the 22nd if paying electronically.
Statements: contractors give each subcontractor a deduction statement within 14 days of the end of each tax month in which a deduction was made.

The VAT domestic reverse charge

Since 1 March 2021, under section 55A of the Value Added Tax Act 1994 and the 2019 Order made under it, the customer, not the supplier, accounts for VAT on certain building and construction services. HMRC's guidance is at VAT domestic reverse charge for building and construction services.

According to HMRC, the reverse charge applies where all of these are true:

the supplier and customer are both registered for VAT in the UK;
the payment is reported under CIS;
the services are standard or reduced rated; and
the customer is not an end user or intermediary supplier that has told the supplier so in writing.

It does not apply to zero-rated supplies or to supplies of staff or workers.

End users and intermediary suppliers

An end user is a business that receives construction services but does not make onward supplies of them, for example a developer or landlord having work done on its own property. An intermediary supplier is connected or linked to the end user and passes the services on without material change. HMRC guidance says these customers should tell their suppliers in writing that they are end users or intermediaries, and the supplier then charges VAT in the normal way.

HMRC guidance also includes a 5% disregard: where the reverse charge element of a supply is 5% or less of its total value, the whole supply can be treated as a normal VAT supply.

Invoicing under the reverse charge

When the reverse charge applies, the supplier's invoice shows all the usual VAT invoice details, states that the reverse charge applies and that the customer must account for the VAT, and shows the amount of VAT due, but does not add the VAT to the amount the customer pays. The customer accounts for the VAT on its VAT return and, if entitled, reclaims it as input tax.

How CIS and the reverse charge interact

The CIS deduction is worked out on the labour element, before VAT. Because the reverse charge VAT is not paid to the supplier, it does not appear in the amount paid. A subcontractor invoice therefore shows labour, materials, the CIS deduction from labour, the net payment, and the reverse charge VAT note.

Records to keep

Verification references and the rate given by HMRC for each subcontractor.
Monthly returns, payment records and deduction statements.
For each supply, the decision on whether the reverse charge applies, and any end user or intermediary notices.

Sources

Templates for this task

CIS + Reverse Charge Subcontractor Invoice – £3
Contractor CIS Monthly Return Tracker + Deduction Statements – £3.50
Reverse Charge Decision Checklist – £2.50
End User / Intermediary Notification Letter – £2
Subcontractor Verification and Onboarding Record – £2.50

Check before use – not legal advice. This guide states the law and official guidance as facts, in our own words, as checked on 2 November 2026. It does not replace professional advice on a specific matter. Contains public sector information licensed under the Open Government Licence v3.0.

CIS and the VAT domestic reverse charge explained