Accounting & Tax for Construction & Trades (CIS)

You must register for CIS as a contractor if you pay subcontractors for construction work and your construction spend exceeds £3 million (cumulative over any 12-month period) — or if you’re in the construction industry and make one-off construction payments. Once registered, you must verify all subcontractors before making the first payment and file monthly returns. Registration is free and can be done online via HMRC.

Under DRC, when you supply construction services to a VAT-registered customer who is also in the CIS, you do not charge VAT on your invoice. Instead, you state on the invoice: ‘VAT Domestic Reverse Charge applies — customer to account for VAT at 20% (or 5%). Customer accounting for VAT under Section 55A VAT Act 1994.’ The customer then accounts for output VAT (Box 1) and input VAT (Box 4) on their own VAT return. Your invoice shows the net amount only — with the DRC note.

CIS deductions suffered (20% or 30% deducted by your contractor from your payments) are offset against your company’s corporation tax and employer PAYE/NIC liabilities. Any surplus is refundable by HMRC — either via your CT600 (for companies) or your self-assessment (for sole traders and partners). HMRC processes CIS reclaims within 25 working days of a complete return being filed. We file CT600s promptly to ensure early reclaims.

GPS allows eligible subcontractors to receive payments without CIS deduction — receiving the full invoice value rather than 80% (verified) or 70% (unverified). To qualify: you must be registered for CIS, have a clean compliance record (all tax returns filed, all taxes paid, no significant tax debt), and have turnover above the threshold (£30,000 for sole traders, £100,000 for partnerships/companies). We apply for GPS on your behalf and maintain the compliance record required to retain it.

DRC applies when: (1) both you and the subcontractor are VAT-registered; (2) both are registered for CIS; (3) the services are construction services (within the scope of CIS); and (4) the subcontractor is not an ‘end-user’ (i.e., they make onward supplies of construction services). If your subcontractor is supplying to you and you are a contractor making onward supplies, DRC applies. If you are the end-user (developer or property owner not making further construction supplies), DRC does not apply — you receive a normal VAT invoice and reclaim input VAT in the usual way.

Paying an unverified subcontractor without CIS deduction — or with the wrong deduction rate — creates liability for the contractor. HMRC holds the contractor responsible for undeducted CIS tax if the subcontractor doesn’t pay it. Always verify before the first payment — the HMRC verification takes 5 minutes online.

DRC only applies when the customer makes onward construction supplies (i.e., is a contractor or developer who will sell or rent the completed work). If your customer is an end-user (occupying the building themselves, not a VAT/CIS-registered construction business), you charge VAT normally. Incorrectly applying DRC to end-user customers creates an output VAT under-declaration for the supplier.

CIS deductions suffered by the company are a tax credit against the CT liability. Many construction company directors are unaware that these deductions generate a direct credit — resulting in an underclaim that is only corrected (if at all) years later by an amended CT600. We claim CIS deductions on every CT600 and pursue the refund.

Labour-only payments to individuals working under the company’s direct supervision, using the company’s tools and equipment, and integrated into the company’s working arrangements are likely employment — PAYE applies, not CIS. Treating employees as CIS subcontractors to avoid PAYE obligations is a known HMRC target area. We assess employment status for all labour payments before the first payment is made.