CIS and VAT: How They Work Together

If you're a self-employed CIS subcontractor and your turnover exceeds the VAT registration threshold (£90,000 for 2025/26), you need to register for VAT. Once you do, CIS and VAT run alongside each other — but they're separate systems with different rules.

This guide explains how they interact, how to invoice correctly, and what the domestic reverse charge means for your work.

CIS and VAT Are Separate

This is the key point: CIS deductions and VAT are calculated independently.

• CIS is an advance payment of Income Tax and National Insurance, deducted by your contractor
• VAT is a consumption tax charged on your services, collected and paid to HMRC through your VAT return

CIS is calculated on the VAT-exclusive amount. VAT is never subject to CIS deduction.

How Invoicing Works With Both

When you're VAT-registered, your invoice shows both VAT and CIS — but they're handled separately.

Standard Invoice (No Reverse Charge)

Labour:                      £2,000.00
Materials:                   £  500.00
Subtotal:                    £2,500.00
VAT at 20%:                  £  500.00
Invoice total:               £3,000.00

CIS calculation (on labour only):
Amount liable to deduction:  £2,000.00
CIS deduction at 20%:        £  400.00

Payment breakdown:
Invoice total:               £3,000.00
Less CIS deduction:          £  400.00
You receive:                 £2,600.00

What happens to each part:

• £400 CIS — Contractor sends to HMRC (credits your Income Tax account)
• £500 VAT — You collect it and pay HMRC through your VAT return
• £2,100 — Cash you receive (£2,000 labour + £500 materials - £400 CIS)

Important: CIS Is Not Calculated on VAT

Notice that CIS was calculated on £2,000 (labour), not on £2,500 (subtotal) or £3,000 (invoice total). VAT sits entirely outside the CIS calculation.

Materials are also excluded from CIS, just as they would be without VAT.

The VAT Domestic Reverse Charge

Since March 2021, a special VAT rule applies to most construction services: the domestic reverse charge. This changes who accounts for VAT.

How It Works

Under the reverse charge, you don't charge VAT on your invoice. Instead, your contractor (the customer) accounts for the VAT on their own VAT return.

Normal VAT: You charge VAT → collect it from the customer → pay it to HMRC Reverse charge: You don't charge VAT → the customer accounts for it directly

When the Reverse Charge Applies

The reverse charge applies when all of these are true:

1. The work falls within the scope of CIS
2. Both you and the contractor are VAT-registered
3. The contractor is not the end user or intermediary supplier connected to the end user
4. You are not supplying staff (employment business supplies are excluded)

End user means the person the construction work is being done for — typically the property owner or developer. If you're working directly for the person who owns the building, the reverse charge usually doesn't apply.

What It Looks Like on Your Invoice

When the reverse charge applies:

Labour:                      £2,000.00
Materials:                   £  500.00
Subtotal:                    £2,500.00
VAT: Domestic reverse charge applies
Invoice total:               £2,500.00

Your invoice must state:
"Customer to account for VAT to HMRC"

CIS calculation (on labour only):
Amount liable to deduction:  £2,000.00
CIS deduction at 20%:        £  400.00

You receive:                 £2,100.00

Key difference: You don't collect VAT, so you receive less cash up front. But you also don't owe that VAT to HMRC on your VAT return.

Services Covered by the Reverse Charge

The reverse charge covers most CIS work:

• Building construction, alteration, and repair
• Demolition
• Infrastructure work (roads, pipelines, drainage)
• Installing heating, lighting, power, and water systems
• Internal cleaning during construction
• Painting and decorating
• Site preparation, excavation, and scaffolding

Services NOT Covered

• Professional services (architecture, surveying, consulting)
• Manufacturing and delivering materials only
• Carpet fitting
• Signage and security system installation
• Artistic work

VAT Registration: When You Need It

You need to register for VAT if:

• Your taxable turnover exceeded £90,000 in the last 12 months, OR
• You expect it to exceed £90,000 in the next 30 days

For CIS subcontractors: Your taxable turnover is your gross income (the full invoice amounts before CIS deductions). CIS deductions don't reduce your turnover for VAT purposes.

Example: You earned £95,000 gross this year. Even though £19,000 was deducted as CIS, your VAT-relevant turnover is £95,000 — above the threshold.

Voluntary Registration

You can register for VAT voluntarily below the threshold. This lets you claim back VAT on business purchases (tools, materials, fuel), which can be worthwhile if your expenses are significant.

Pros of voluntary registration:

• Reclaim VAT on purchases (20% back on tools, fuel, etc.)
• Appear more established to larger contractors

Cons:

• Extra admin (quarterly VAT returns)
• May need to charge VAT to non-VAT-registered customers
• Cash flow impact with the reverse charge (you don't collect VAT but still pay it on purchases)

VAT Schemes for Subcontractors

Flat Rate Scheme

The Flat Rate Scheme lets you pay a fixed percentage of your gross turnover as VAT, instead of tracking VAT on every purchase and sale.

For most construction work, the flat rate is 9.5% of your gross turnover (or 8.5% in your first year of registration).

Example: You invoice £10,000 (+ £2,000 VAT = £12,000 total). Under the flat rate, you pay HMRC 9.5% × £12,000 = £1,140 instead of £2,000. You keep the £860 difference.

Note: You can't reclaim VAT on purchases under the flat rate scheme (except capital goods over £2,000). So this works best if your expenses are low relative to your income.

Important: The flat rate scheme does not apply to services covered by the domestic reverse charge. If most of your work falls under the reverse charge, the flat rate scheme may not be beneficial.

Cash Accounting

Under cash accounting, you account for VAT when you receive or make payment, not when you issue or receive an invoice. This helps cash flow if clients pay late.

Keeping CIS and VAT Records Separate

Managing both systems is simpler if you keep clear records:

For CIS:

• Payment statements from contractors (monthly)
• Total CIS deductions for the year
• Your Self Assessment return figures

For VAT:

• VAT invoices issued (with or without reverse charge noted)
• VAT invoices received (for purchases)
• Quarterly VAT return calculations
• VAT payments made to HMRC

Tip: Use separate columns or categories in your bookkeeping for CIS deductions and VAT. They go to different places — CIS feeds into Self Assessment, VAT feeds into your quarterly VAT returns.

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This guide is for informational purposes only and does not constitute tax, legal, or financial advice. Tax rules change frequently. Always verify current requirements on GOV.UK or consult a qualified accountant for your specific situation.

Official Sources

• VAT domestic reverse charge for construction - GOV.UK
• VAT registration - GOV.UK
• VAT Flat Rate Scheme - GOV.UK
• CIS for subcontractors - GOV.UK