VAT for Subcontractors: CIS and Reverse Charge Rules Explained

Does a Subcontractor Have to Register for VAT?

A subcontractor may need to register for VAT when taxable
turnover reaches the compulsory registration threshold set by
HMRC. A business below that threshold may also choose voluntary
registration.

Once registered, the subcontractor must determine whether a
transaction uses normal VAT rules, the domestic reverse charge,
a reduced or zero rate, an exemption or another special VAT
treatment.

CIS registration does not automatically create VAT registration.
CIS and VAT are separate systems with different requirements.

What Is the Construction Industry Scheme?

The Construction Industry Scheme is a tax deduction system for
contractors and subcontractors working in the UK construction
industry.

Contractors must verify subcontractors with HMRC before making
payments. HMRC then confirms the appropriate deduction status.

CIS deductions are generally calculated after VAT and eligible
direct material costs have been excluded.

What Is the VAT Domestic Reverse Charge?

The VAT domestic reverse charge changes which business is
responsible for accounting for VAT on qualifying construction
services.

The contractor may recover the VAT as input tax, subject to the
usual VAT rules.

When Does the Reverse Charge Apply?

The construction domestic reverse charge will generally apply
when:

• The supplier is registered for VAT in the UK.
• The customer is registered for VAT in the UK.
• The construction work falls within CIS.
• The service is standard-rated or reduced-rated.
• The customer is making an onward supply.
• The customer is not the final consumer or end user.
• The transaction is not covered by an exclusion.

The subcontractor should confirm the customer’s VAT status and
establish whether the customer is an end user before issuing
the invoice.

When Does It Not Apply?

• The customer is not registered for VAT.
• The supplier is not registered for VAT.
• The customer is the end user.
• The work is performed directly for a private homeowner.
• The service is zero-rated.
• The work falls outside CIS.
• Only materials are supplied without construction work.

Who Is an End User?

An end user is a VAT-registered customer that receives
construction services but does not make an onward supply of
those services.

Examples may include:

• A property owner improving its own commercial property
• A company arranging work on its own office
• A landlord commissioning work for its own property
• An organisation using the completed building itself

When a customer is an end user and provides the necessary
confirmation, normal VAT rules will generally apply.
Contractors and subcontractors should retain the confirmation.

Which Construction Services Can Be Covered?

• Building construction and alterations
• Repairs, painting and decorating
• Demolition and dismantling
• Civil engineering work
• Site preparation
• Electrical installation
• Heating and ventilation installation
• Drainage and water system installation
• Installation of permanent building systems

Certain independently supplied professional, architectural,
surveying and consultancy services may fall outside the
scheme. Mixed contracts should be reviewed carefully.

How Do CIS and VAT Work Together?

• VAT is not normally included in a CIS deduction.
• Eligible direct material costs may be excluded.
• The contractor uses the status confirmed by HMRC.
• Labour and materials should be separated where relevant.
• The reverse-charge invoice must contain clear wording.
• CIS and VAT must be recorded separately.

What Should a Reverse-Charge Invoice Include?

• The subcontractor’s legal name and address
• The customer’s name and address
• A unique invoice number
• The invoice and supply dates
• A description of the construction services
• The net value of the work
• The applicable VAT rate
• The VAT amount due under the reverse charge
• The subcontractor’s VAT registration number
• A labour and materials breakdown where relevant
• Clear reverse-charge wording

Common VAT and CIS Mistakes

Records Contractors and Subcontractors Should Keep

• Sales and supplier invoices
• CIS verification results
• Payment and deduction statements
• Material invoices and receipts
• Contracts and work orders
• End-user confirmations
• VAT registration information
• Accounting software records
• Bank payment evidence
• Relevant correspondence

Good records create a clear audit trail and help explain why a
particular VAT and CIS treatment was selected.

VAT and CIS Checklist for Subcontractors

Frequently Asked Questions

Does the reverse charge apply to every subcontractor?

No. VAT registration, CIS coverage, the type of service and
the customer’s position must all be considered.

Is CIS deducted before or after VAT?

CIS deductions are generally calculated after VAT and eligible
direct material costs have been excluded.

Does CIS registration include VAT registration?

No. CIS and VAT registrations are separate obligations.

Can CIS be deducted from materials?

Eligible direct materials paid for by the subcontractor are
generally excluded before the CIS deduction is calculated.
Supporting evidence should be retained.

What happens when the customer is an end user?

When the customer provides the necessary end-user confirmation,
normal VAT rules will generally apply instead of the domestic
reverse charge.

Does the reverse charge apply to work for homeowners?

It will not normally apply to work supplied directly to a
private homeowner.