Who this is for: UK developers, main contractors, and specialist subs who need to get both regimes right on the same invoice so cashflow, filings and audits line up.
Why it matters: On many jobs, CIS and the VAT Domestic Reverse Charge (DRC) apply at the same time. Get one wrong and you’ll misstate VAT, deduct the wrong CIS, or trip penalty points. The headline: CIS applies to the labour element only, while DRC (when in scope) pushes VAT accounting to the customer on the whole supply—unless the customer has given written end user/intermediary notification. GOV.UK
First principles (plain English)
- CIS: verify subs, then apply 0% / 20% / 30% to the labour portion only; exclude materials/eligible plant from the deduction base; issue statements; file CIS300 by the 19th. → Subcontractor verification and CIS300 & Payment/Deduction Statements. GOV.UK
- DRC: when in scope (most CIS-reportable construction services between UK VAT-registered businesses), the supplier does not charge VAT; the customer reverse-charges VAT on the full taxable value. End-users/intermediary suppliers must notify in writing to keep normal VAT rules. Employment businesses supplying workers are outside DRC. GOV.UK
Decision flow: do we use DRC, CIS, or both?
- Employment status first
Is this genuinely a self-employed subcontractor engagement (not employment)? If unsure, run CEST and file the result. If it’s employment, CIS/DRC don’t apply.
→ CIS isn’t employment status: getting PAYE vs subcontractor right - CIS in scope?
If the work is a CIS construction operation, apply CIS rules (verify, decide 0/20/30, deduct on labour only). GOV.UK - DRC conditions met? (all must be yes) GOV.UK
- Both parties VAT-registered in the UK
- Supply is within CIS scope (but not a workers/employment business supply) GOV.UK
- Supply is standard- or reduced-rated (not zero-rated)
- No written end-user/intermediary notification received
If yes → DRC applies (no VAT on invoice; customer reverse-charges). If no → normal VAT rules.
- End-user/intermediary supplier letters
If your customer confirms in writing they’re an end user or an intermediary supplier, DRC does not apply charge VAT as normal. Suggested HMRC wording is provided in the technical guide (see below). GOV.UK
The invoice: what it must show when both apply
When you’re the supplier and DRC does apply:
- VAT: show no VAT charged and state that VAT is to be accounted for by the customer under the domestic reverse charge, including the VAT rate that would have applied (e.g., 20% or 5%). GOV.UK
- CIS: split labour vs materials so CIS is calculated on labour only your accounts software should hold the CIS base separately. → CIS invoice anatomy: labour vs materials (with worked examples) GOV.UK
Example wording block (supplier invoice, DRC applies):
“VAT domestic reverse charge: Customer to account for VAT at the [20%/5%] rate. No VAT charged on this invoice.” (Then show net amounts; your customer self-accounts VAT on the total supply.)
If your customer notifies end-user/intermediary status (DRC does not apply):
Charge VAT as normal and retain their written notification with the job file. HMRC suggests:
“We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.” GOV.UK
Worked example (side-by-side)
Scenario: VAT-registered sub → VAT-registered main contractor. CIS-reportable service. No end-user/intermediary letter.
| Line | Amount | DRC treatment | CIS treatment |
|---|---|---|---|
| Labour | £10,000 | Part of DRC total | CIS base = £10,000 |
| Materials | £4,000 | Part of DRC total | Excluded from CIS base |
| VAT on invoice | £0 | Customer reverse-charges VAT on £14,000 | n/a |
| CIS deduction (20%) | £2,000 | n/a | Deducted on labour only |
You pay the sub £12,000 and report £2,000 on the CIS300 (file by the 19th, pay by the 22nd if electronic). Keep the PDS aligned to the invoice. → CIS300 & Payment/Deduction Statements GOV.UK
Common traps (and how to avoid them)
- Copying CIS logic into VAT. CIS is labour only; DRC covers the whole supply when in scope—don’t try to “exclude materials” from DRC. GOV.UK
- No written end-user note. Without written notification, treat the customer as not an end user and apply DRC (if other conditions met). Email/contract wording is fine—keep it on file. GOV.UK
- Employment businesses vs labour-only subs. Supplies of workers by an employment business are outside DRC; supplies by labour-only subcontractors are within DRC if other conditions are met. GOV.UK
- Software templates mis-set. Lock DRC invoice wording and VAT codes; lock CIS base calculation on labour lines. Your returns should then reconcile cleanly month-end.
- Forgetting CIS returns. Even with DRC correct, late/incorrect CIS300 triggers penalties—close the month with statements + return. → CIS300 & Payment/Deduction Statements
Quick reference (what to read on GOV.UK)
- When you must / must not use DRC (scope, services list, conditions). GOV.UK
- Technical guide (end-user/intermediary notification, suggested wording, 5% disregard, flowcharts). GOV.UK
- Employment businesses vs labour-only (DRC does not apply to supplies of workers by employment businesses). GOV.UK
- CIS 340 (CIS on labour only; contractor duties; monthly returns). GOV.UK
- VAT Notice 735 (reverse charge procedure background). GOV.UK