CIS and the Domestic Reverse Charge - What Every Contractor and Subcontractor Needs to Know
The Construction Industry Scheme (CIS) and the Domestic VAT Reverse Charge are two separate sets of legislation that often apply to the same businesses. As a result, they are frequently confused.
A common misconception is that if work falls within CIS, the Domestic Reverse Charge automatically applies, or that all work carried out on residential properties is outside CIS. Neither of these statements is correct.
This guide explains when CIS applies, when the Domestic Reverse Charge applies, and how the two interact.
What is CIS?
The Construction Industry Scheme (CIS) requires contractors to deduct tax from payments made to subcontractors carrying out construction operations.
If a subcontractor is registered for CIS, deductions are generally made at:
20% for registered subcontractors.
30% for unregistered subcontractors.
0% where gross payment status has been granted.
These deductions are paid to HMRC and count towards the subcontractor's tax liability.
What is Gross Payment Status?
Some subcontractors can apply for Gross Payment Status (GPS) under CIS. This means contractors pay them without making CIS deductions, allowing the subcontractor to receive their income in full.
This can significantly improve cash flow, as the subcontractor does not have to wait until their Self Assessment or Corporation Tax return is submitted to recover any excess CIS deductions.
To qualify for Gross Payment Status, HMRC requires the subcontractor to satisfy three tests:
1. Business Test
The business must genuinely carry on construction work (or provide labour for construction work) in the UK.
2. Turnover Test
The business must meet HMRC's minimum turnover requirements. Broadly, the annual construction turnover must be at least:
£30,000 for an individual sole trader.
£30,000 for each partner in a partnership (up to a maximum of £100,000).
£30,000 for each director in a limited company (up to a maximum of £100,000).
The turnover relates to construction income before materials and VAT.
3. Compliance Test
The business must have a good compliance history. HMRC will review whether tax returns have been submitted on time and whether PAYE, VAT, Corporation Tax and Self Assessment liabilities have been paid on time.
If the application is successful, contractors pay the subcontractor gross, with no 20% CIS deduction being withheld. However, the subcontractor remains responsible for paying their own Income Tax or Corporation Tax through the normal tax system.
It is important to note that Gross Payment Status does not affect whether CIS applies. It simply changes whether deductions are made at source. Contractors must still verify the subcontractor with HMRC and continue reporting payments through their monthly CIS returns.
Does work on residential properties fall outside CIS?
No.
Whether CIS applies depends on who the customer is, rather than whether the property is residential or commercial.
For example:
CIS does not apply:
A private homeowner hires a builder to construct an extension.
A homeowner hires an electrician to rewire their own property.
The homeowner is not acting as a CIS contractor, so no deductions are required.
CIS may apply:
A property developer building new houses.
A construction company building residential developments.
A housing association carrying out refurbishment works.
A business maintaining its rental property portfolio where the CIS rules apply.
Although the work is carried out on residential properties, the customer is acting as a contractor, meaning CIS can still apply.
What is the Domestic VAT Reverse Charge?
The Domestic VAT Reverse Charge is an anti-fraud measure introduced by HMRC for certain construction services.
Where it applies:
The subcontractor does not charge VAT.
The contractor accounts for the VAT on their own VAT return.
The reverse charge only applies where all of the following conditions are met:
The supply is within the scope of CIS.
Both parties are VAT registered.
The services are standard-rated or reduced-rated for VAT.
The customer is not an end user or intermediary supplier.
What is an end user?
This is probably the area that causes the most confusion.
An end user is the final business receiving the construction services. They are not buying the services in order to supply further construction services to another customer.
For example, consider the following supply chain:
Property Developer
↓
Main Contractor
↓
Bricklaying Subcontractor
The bricklayer provides construction services to the main contractor.
The main contractor provides construction services to the property developer.
The property developer is the end user because it is receiving the construction services to develop its own land. Although it will eventually sell the completed houses, it is not selling construction services.
Therefore:
The subcontractor invoices the main contractor using the Domestic Reverse Charge (assuming all conditions are met).
The main contractor invoices the developer with normal VAT, provided the developer has notified the contractor that it is an end user.
How does this work in practice?
Example 1 – Private homeowner
A VAT-registered builder installs a new kitchen for a homeowner.
CIS: No.
Domestic Reverse Charge: No.
VAT: Normal VAT is charged.
Example 2 – Construction subcontractor
A bricklayer carries out work for a VAT-registered main contractor on a new housing development.
CIS: Yes.
Domestic Reverse Charge: Yes.
VAT: No VAT is charged on the invoice. The contractor accounts for the VAT under the reverse charge rules.
Example 3 – Main contractor invoices the developer
The main contractor completes part of the housing development and invoices the developer.
The developer has provided an end user notification.
CIS: May still apply.
Domestic Reverse Charge: No.
VAT: Normal VAT is charged.
Common misconceptions
"Residential work is outside CIS."
Incorrect. Work carried out on residential properties can still fall within CIS if the customer is acting as a contractor.
"If CIS applies, the reverse charge always applies."
Incorrect. The reverse charge only applies if all of the relevant VAT conditions are met, including both parties being VAT registered and the customer not being an end user.
"The end user is the person who eventually buys the building."
Incorrect. The end user is the last business in the construction supply chain receiving the construction services. A property developer building houses for sale is often the end user, even though the completed houses are later sold to individual purchasers.
The Bottom Line
CIS and the Domestic VAT Reverse Charge are closely linked, but they are not the same. Understanding when each set of rules applies is essential to ensuring invoices are raised correctly, the correct VAT treatment is applied, and CIS obligations are met.
Many of the mistakes we see arise from simple misunderstandings, such as assuming all residential work falls outside CIS or that the reverse charge applies to every construction invoice. Taking the time to understand your position, or seeking advice before raising invoices, can help avoid costly errors, VAT corrections and potential HMRC penalties.
If you're unsure whether your work falls within CIS, whether you qualify for Gross Payment Status, or whether the Domestic Reverse Charge applies to your invoices, Surrey Hills Tax Limited is here to help. Get in touch with our team today for tailored advice and support.
Disclaimer: This article is for general information only and does not constitute tax advice. Tax treatment depends on individual circumstances and may change.