Standard rate CIS and domestic reverse charge

Hi, I have a subcontractor who has provided work under the scope of CIS for say £2,000. They have applied the reverse charge on their invoice. As they are under the standard CIS deduction rate of 20%, they have applied this 20% to the Gross value. So invoice states work done for £2,000, VAT reverse charged - £400, CIS deduction - £400, amount payable to supplier - £2,000. Since they have applied the VAT reverse charge, are these amounts correct or should it be - work done for £2,000, VAT reverse charged - £400 (but not applied so £0), CIS deduction - £400, amount payable to supplier - £1,600. Most of our subcontractors have gross status which have always made things easier. Thanks

The Construction Industry Scheme (CIS) and the Domestic Reverse Charge (DRC) are both important concepts in the UK VAT system, particularly for those involved in the construction sector. Here’s a breakdown of each: ### Construction Industry Scheme (CIS) **Overview:** - The CIS is a set of special rules for handling payments made by contractors to subcontractors for construction work. - It applies to contractors, subcontractors, and businesses in the construction industry. **Key Points:** - **Registration:** Contractors must register for CIS. Subcontractors can choose whether or not to register, but higher tax deductions apply if they don't. - **Deductions:** Contractors deduct money from a subcontractor’s payments and pass it to HMRC. These deductions count as advance payments towards the subcontractor’s tax and National Insurance. - **Monthly Returns:** Contractors must submit monthly returns to HMRC detailing payments made to subcontractors. **Rates:** - Standard rate: 20% deduction for registered subcontractors. - Higher rate: 30% deduction for unregistered subcontractors. - Gross rate: No deductions for eligible subcontractors who apply and qualify for gross payment status. ### Domestic Reverse Charge (DRC) **Overview:** - The DRC for building and construction services, often referred to as the "reverse charge," changes the way VAT is accounted for in the construction industry. - Introduced to combat VAT fraud in the construction sector. **Key Points:** - **Scope:** Applies to supplies of construction services between VAT-registered businesses where the recipient makes an onward supply of those construction services. - **Accounting:** Instead of the supplier charging and accounting for the VAT, the recipient of the supply accounts for it. - **Services Covered:** Includes most supplies of building and construction services. Excludes services supplied to non-VAT registered customers, supplies of staff or workers, and some others. **How It Works:** - **Invoice:** The supplier issues an invoice stating that the reverse charge applies, but does not charge VAT. - **Recipient:** The recipient records the VAT on their VAT return as both output tax and input tax, meaning no net tax is payable. **Exceptions:** - Supplies to an end user or intermediary supplier are excluded from the DRC. - Applies only to standard and reduced rate services. Zero-rated supplies are not affected. ### Practical Implications - **Contractors:** Must ensure they are compliant with both CIS and DRC rules, correctly processing deductions and applying the reverse charge where applicable. - **Subcontractors:** Need to understand how CIS deductions affect their cash flow and tax obligations and how the reverse charge impacts their VAT reporting. ### Example Scenario A VAT-registered contractor engages a VAT-registered subcontractor for construction services: 1. **CIS:** The contractor deducts 20% from the subcontractor's payment (if the subcontractor is CIS registered) and submits this to HMRC. 2. **DRC:** The subcontractor issues an invoice stating "reverse charge applies" and does not charge VAT. The contractor records the VAT as both input and output tax on their VAT return. ### Resources - **HMRC CIS Guide:** [HMRC CIS](https://www.gov.uk/what-you-must-do-as-a-cis-contractor) - **HMRC DRC Guide:** [HMRC DRC](https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services) If you have specific scenarios or further details, feel free to provide them for more tailored advice.

Hi,

A subcontractor is paid under deduction at the verified rate of 20%. This deduction is taken from the labour provided by the subcontractor, deductions are not made for any materials they may have had to purchase. In this case if the invoice shows £2000 labour then the deduction at 20% is £400 leaving a net payment to the subcontractor of £1600.

Thank you.