Reverse charge VAT and CIS: the invoice most subcontractors get wrong
- Evelia
- 13 hours ago
- 6 min read
Two different rules land on the same invoice, they were introduced fifteen years apart, and they do not behave the same way. One changes who accounts for the VAT. The other takes a slice from the payment and sends it to HMRC. Neither is complicated on its own. Together they cause more head-scratching than almost anything else in a subcontractor’s paperwork. Here is what should be on the invoice, and why.
CIS first, because it is the older of the two
Under the Construction Industry Scheme, a contractor deducts tax from what it pays a subcontractor and sends that money to HMRC on the subcontractor’s behalf. The rate is not chosen by the contractor. It comes from HMRC when the subcontractor is verified.
There are three rates: 20% if you are registered as a subcontractor, 30% if you are not registered or verification fails, and 0% if you hold gross payment status.
That ten-point gap between registered and unregistered is worth saying plainly, because registering is one of the simplest ways to protect your cash flow. If you are being deducted at 30%, it may be because you are not registered or because your details did not match HMRC’s records during verification. A mismatched UTR or a different business name can be enough.
The CIS deduction is calculated after VAT and qualifying costs have been removed from the invoice total. These costs can include materials the subcontractor paid for directly, certain plant hire, consumable stores and fuel used on the job.
Showing labour, materials and other costs separately on the invoice makes the correct deduction much easier to calculate. You should also keep evidence of what you paid, as the contractor can ask for receipts or other proof.
A lump-sum description such as “electrical works, £4,000” makes it harder to identify the qualifying costs. That can lead to an unnecessarily high deduction or a request for more evidence. The same job, clearly split into labour and materials, is much easier to process correctly.
None of this is extra tax. The deduction counts as an advance payment towards the income tax and National Insurance you would owe anyway, and it is reconciled when you file. But it comes out of your cash flow now and may not be reconciled until much later, which is not the same thing at all.
Then reverse charge, which does something different
The domestic reverse charge for building and construction services has applied since March 2021. Where it applies, the supplier does not charge and collect VAT in the usual way. The customer accounts for the VAT instead.
It generally applies when the supplier and customer are VAT-registered in the UK, the services fall within the scope of CIS, the payment must be reported through CIS, the customer is CIS-registered, and the customer has not confirmed in writing that it is an end user or intermediary supplier. The supply must also be standard- or reduced-rated rather than zero-rated.
If those conditions are not met, VAT is normally charged in the usual way.
The end user test is where much of the confusion sits. An end user buys construction services for its own use rather than selling those services on as part of another construction supply. A main contractor engaging you on a commercial fit-out is generally not an end user. A business having work done on its own premises may be one.
If the customer is an end user, they should confirm this in writing. If they do not provide written confirmation and the other reverse charge conditions are met, the supplier should apply the reverse charge.
Asking for confirmation is not an admission of ignorance. It is part of applying the rules correctly, and the written record helps demonstrate why the invoice was treated in a particular way. The invoice must make the position clear. It needs to state that the reverse charge applies and show the VAT rate. The amount of VAT the customer must account for should normally also be stated, but it must not be included in the total VAT charged.
HMRC accepts wording such as:
“Reverse charge: customer to pay the VAT to HMRC.”
Using one of HMRC’s suggested phrases is the safest route.
There is also a limited 5% disregard. Where the reverse charge element is 5% or less of the total value of the supply under the contract, the parties may agree to treat the whole supply under the normal VAT rules.
This is not an invoice-by-invoice test. It should be based on the overall contract value and agreed by both parties from the start of the contract.
The three mistakes that actually cost money
Not registering for CIS
An unregistered subcontractor can face a 30% deduction instead of the standard 20%. That is ten percentage points more taken from each relevant payment until the situation is corrected.
Hiding labour and materials inside one figure
A single lump sum makes it harder for the contractor to identify costs that should be excluded before calculating the CIS deduction. Clear invoice lines and evidence of material costs help prevent unnecessary deductions and delays.
Guessing the customer’s end user status
Getting it wrong in one direction can mean VAT was not charged when it should have been. Getting it wrong in the other can mean charging VAT that should have been handled through the reverse charge.
Written confirmation costs one email.
Worth knowing: gross payment status
Gross payment status means contractors pay you without making CIS deductions. You receive the full payment and settle your own tax liabilities.
To qualify, the business must meet HMRC’s business, turnover and compliance tests. Compliance now includes relevant VAT filing and payment obligations as well as other tax responsibilities.
For a subcontractor with sufficient construction turnover and a strong compliance record, gross payment status can make a significant difference to cash flow. It also has to be maintained, because HMRC reviews the status and can withdraw it if the requirements are no longer met. It is worth discussing with your accountant rather than trying to work it out from a blog post.
Getting it right without checking every invoice
None of the above is especially difficult once. The problem is that it is not once. It is every invoice, for every customer, and the treatment can differ between two jobs in the same week. That is why these rules belong in the way invoices are produced rather than in somebody’s memory. When labour, materials and other costs are separated because that is how the job was recorded, the CIS calculation becomes easier to check. When the customer’s reverse charge and end user status is stored correctly, the right invoice wording can appear automatically.
Good invoicing and financial tools make the paperwork right by default rather than right only when somebody remembers. The right integrations can also reduce repeated data entry between job management, invoicing and accounting. The alternative is checking every invoice by hand, which works fine until the week you are too busy.
Frequently asked questions
What are the CIS deduction rates?
The rates are 20% for registered subcontractors, 30% for unregistered subcontractors or those HMRC cannot verify, and 0% for subcontractors with gross payment status. HMRC confirms the applicable rate during verification.
Is CIS deducted from materials?
Qualifying material costs are removed before the CIS deduction is calculated, provided the subcontractor paid for them directly. The contractor may ask for evidence of the costs.
When does the VAT reverse charge apply?
It generally applies when the supplier and customer are UK VAT-registered, the construction services fall within CIS, the payment must be reported through CIS, the customer is CIS-registered, and the customer has not confirmed that it is an end user or intermediary supplier. The supply must also be standard- or reduced-rated.
What has to appear on a reverse charge invoice?
The invoice must clearly state that the reverse charge applies and include the information normally required on a VAT invoice. It should show the applicable VAT rate and normally the amount the customer must account for, without including that amount in the total VAT charged.
How do I know if my customer is an end user?
Ask the customer to confirm their status in writing. An end user buys the construction services for its own use rather than making an onward supply of those services. If no written confirmation is provided and the other conditions are met, the reverse charge should normally be applied.
Does gross payment status affect the reverse charge?
No. CIS deduction status and the VAT reverse charge are separate. The reverse charge applies or does not apply regardless of whether the subcontractor is paid gross or subject to a CIS deduction.
This article provides general information for contractors and does not constitute tax advice. Check the current rules and rates on GOV.UK or speak to your accountant.
Sources
Want to make invoicing simpler? Book a demo of Evelia.
The content on this page may have been created or reviewed with the help of AI.
Comments