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CIS Deductions and VAT Reverse Charge
What do I actually pay a subcontractor after the CIS deduction, and how does the VAT reverse charge fit in?
CIS applies to labour only: £48,600 less £11,800 of materials leaves £36,800, and 20% of that is £7,360 for HMRC, so Haughmoor receives £41,240. The 20% rate needs a verification on record; without it the app applies 30% (£11,040 withheld). VAT of £9,720 is shown but not charged on the invoice under the domestic reverse charge. The app only previews the deduction: it does not pay the net figure, verify with HMRC, file the return, give the subcontractor a statement, or mark reverse-charge invoices.
We work through a subcontract payment in OpenConstructionERP with CIS deductions and the domestic VAT reverse charge. The example separates labour and materials, follows the invoice and shows how the payment is recorded.
You will produce
A checked payment to Haughmoor: £48,600 gross less £11,800 materials gives a £36,800 CIS base, £7,360 tax withheld at 20%, and £41,240 net payable, with £9,720 VAT under the reverse charge.
Sources
- Construction Industry Scheme (HMRC)
- Domestic reverse charge for construction services (VAT)
Transcript
0:00 The rules
This lesson is about paying a subcontractor on a UK job. You'll work out the CIS deduction, deal with the VAT reverse charge, and check the payment in the app before it leaves. Suppose you pay Haughmoor all £48,600. Then Tandlewick skips a £7,360 tax deduction that it must make. By the end, you'll know exactly what leaves the bank. Last time, Tandlewick's QS agreed Haughmoor's application in a payment notice. Now it gets paid. On one side, Tandlewick's QS. On the other, Haughmoor's contracts manager. Under the Construction Industry Scheme, Tandlewick is a contractor. When it pays a subcontractor without gross status, it must deduct tax, and pay it to HMRC. Because Haughmoor is registered, the rate is 20%. But never on the materials it paid for. £48,600, less £11,800, is £36,800. 20% of that is £7,360. So Haughmoor gets £41,240, and £7,360 goes to HMRC. The rate depends on verifying the subcontractor with HMRC before the first payment. Registered: 20%. Not registered: 30%, which here would be £11,040. Gross payment status: nothing. That's Tandlewick's own status, so a contractor paying Tandlewick deducts nothing. Each tax month runs from the 6th to the 5th. The monthly return is due by the 19th after it ends, with a payment and deduction statement for Haughmoor. Pay HMRC by the 22nd, if you pay electronically. Since April 2026, if you've paid subcontractors before, a month with no payments needs a nil return. The exception: you told HMRC at least 14 days before. Now the VAT. Both firms are VAT-registered, and groundworks are reported under CIS. It's standard-rated work, and Tandlewick isn't an end user. So the domestic reverse charge applies. On Haughmoor's invoice, the VAT of £9,720 is shown, but not charged. The customer, Tandlewick, accounts for that VAT on its own return, and under the normal rules reclaims it there too. Notice the bases differ: CIS on £36,800, VAT on the whole £48,600. The reverse charge stops at the end user. Quayfold, the client, has confirmed in writing that it is one. So Tandlewick's own invoices to Quayfold charge VAT as normal.
3:09 The scheme
In OpenConstructionERP, open Withholding Tax under Commercial. On a new system, click Install the shipped schemes first. We did that before filming. The Construction Industry Scheme card lists three bands. The 30% band is the default. And the footer says materials and VAT are excluded.
3:32 Work it out
Now scroll up to the deduction preview. Pick the scheme, then Haughmoor's standing: its verification on record. There's no screen to record one, so we added it through the app's API before filming. Type the gross, £48,600, and the materials, £11,800. VAT is £0, because of the reverse charge. Click Work out the deduction. The taxable base is £36,800. Tax withheld: £7,360, at 20%. Net payable: £41,240. And nothing is saved: it's a check before the payment goes. Now clear the standing, pick the 20% band by hand, and work it out again. The app won't use that band, and says why: it needs a verification on record. So it applies 30%. Tax withheld becomes £11,040, and Haughmoor would get £37,560. The app leaves three things to you. It doesn't deduct on the payment itself, so pay Haughmoor the net figure by hand. It doesn't verify with HMRC, file the monthly return, or give Haughmoor its statement: your CIS software does those. And it has no reverse-charge marker on an invoice, so check the wording on Haughmoor's.
5:02 Get it right
Here are three mistakes we see. One: deducting on the whole £48,600, materials included. That takes £2,360 too much from Haughmoor. Two: paying VAT on a reverse-charge invoice. If Haughmoor charges it, send the invoice back. Three: assuming 20% without verifying. If they aren't registered, it's 30%, and you deduct £3,680 too little. Pro tip. Ask Haughmoor's contracts manager to show materials separately on every application. And keep the materials invoices with the payment, in case HMRC asks. Pause the video. Haughmoor's November application is £30,000, with £6,000 of materials. The firm is verified at 20%. What does Tandlewick pay Haughmoor? The answer: £25,200. Take off the £6,000 of materials: 20% of £24,000 is £4,800, for HMRC. Here's your checklist. It's also in the description, to download. OpenConstructionERP is free and open source, and it runs on your own server. No subscription, no per-seat licence. Next time: a change on site. The architect adds two meeting rooms.
