CIS and the VAT reverse charge
Since 1 March 2021, when a VAT-registered subbie does construction work for a VAT-registered contractor and the payment goes through CIS, the contractor accounts for the VAT, not the subbie. The subbie's invoice charges no VAT. The exception is a contractor who has told the subbie in writing that they are an end user or an intermediary.
When the CIS domestic reverse charge applies
It applies to a supply of construction services when all of these are true:
- the subbie and the contractor are both registered for VAT in the UK
- the work is within CIS, and the payment for it is reported on the contractor's CIS return
- the work is standard-rated or reduced-rated for VAT
- the contractor hasn't told the subbie in writing that they are an end user or an intermediary
It covers labour-only subbies as well as subbies who supply materials with the work.
When the reverse charge doesn't apply: end users, intermediaries and zero-rated work
An end user is a business registered for VAT and CIS that doesn't sell the construction work on. An intermediary is connected to the end user and passes the work on to it. Either one can tell its subbies in writing (by post, by email or in the contract) that it is an end user or an intermediary. Those subbies then charge VAT the normal way. GOV.UK gives this wording:
"We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services."
Zero-rated work is outside the reverse charge, including standard-rated items that are part of a zero-rated supply, such as scaffolding for a zero-rated new build.
Supplies of workers by an employment business are outside it too.
The 5% rule for jobs that are mostly outside the reverse charge
If the part of a job that the reverse charge covers is 5% or less of the value of the whole supply, the subbie and the contractor can agree, at the start of the contract, to ignore it and charge normal VAT on the lot. The 5% is worked out on the overall contract value, not invoice by invoice. It doesn't apply where most of the job is zero-rated.
What a reverse charge invoice must say
The subbie's invoice charges no VAT. It must:
- show everything a normal VAT invoice shows
- include the words "reverse charge" and make clear that the contractor, not the subbie, accounts for the VAT
- show how much VAT is due under the reverse charge, or, where that can't be shown, the VAT rate, without adding the VAT to the amount charged
The law doesn't set the exact words. HMRC gives these examples:
- "Reverse charge: VAT Act 1994 Section 55A applies"
- "Reverse charge: S55A VATA 94 applies"
- "Reverse charge: Customer to pay the VAT to HMRC"
CIS is never taken from VAT
The CIS deduction is worked out on the payment excluding VAT, whether or not the reverse charge applies. If the subbie is VAT registered, their materials come off without the VAT they paid on them. So the reverse charge changes who deals with the VAT, but not the CIS deduction.
Worked example: CIS deduction and reverse charge VAT on one payment
Mo is a VAT-registered plasterer, verified at the standard 20% CIS rate. He bills a VAT-registered contractor £1,000.00 for labour and £200.00 for materials, which is what they cost him before VAT. The work is standard-rated and the contractor isn't an end user, so his invoice shows £1,200.00 with no VAT added, and a reverse charge note that VAT of £240.00 is due.
| Invoice total, no VAT charged | £1,200.00 |
|---|---|
| Less cost of materials | £200.00 |
| Amount liable to deduction | £1,000.00 |
| CIS deducted at 20% | £200.00 |
| Net paid to Mo | £1,000.00 |
The contractor pays Mo £1,000.00 and pays the £200.00 CIS to HMRC. On its own VAT return it puts the £240.00 in box 1 as output VAT, can reclaim it in box 4 under the normal VAT rules, and puts £1,200.00 in box 7. Mo enters £1,200.00 in box 6 and no output VAT on the sale.
The CIS calculator gives the same deduction: leave the VAT blank.