What is CIS reverse charge?

The CIS (Construction Industry Scheme) reverse charge is a mechanism used in the UK to collect VAT (Value Added Tax) on construction services. Under the CIS, contractors are required to pay the VAT due on their construction services directly to HM Revenue and Customs (HMRC) rather than charging it to the client. The client is then required to report the VAT on their VAT return.

The CIS reverse charge applies to supplies of construction services made by a business to another business, where the recipient is registered for VAT in the UK. It does not apply to supplies of construction services made to a non-business customer or to a business that is not registered for VAT in the UK.

The purpose of the CIS reverse charge is to ensure that VAT is properly collected on construction services in the UK. It helps to prevent VAT fraud in the construction industry by requiring contractors to pay VAT directly to HMRC rather than charging it to their clients.

As an example, imagine a company called “Build2Co” provides construction services to another company called “Use3Co.” Build2Co is registered for VAT in the UK and Use3Co is also registered for VAT in the UK.

Under the CIS, Build2Co is required to pay the VAT due on its construction services directly to HMRC. Build2Co cannot charge VAT to Use3Co. Instead, Build2Co must issue an invoice to Use3Co showing the value of the construction services without VAT.

Use3Co is required to report the VAT on its VAT return. This means that Use3Co will need to account for the VAT due on the construction services it received from Build2Co on its VAT return and pay the VAT to HMRC.

In this example, Build2Co acts as the “supplier” of construction services and Use3Co acts as the “recipient.” The CIS reverse charge applies because both Build2Co and Use3Co are registered for VAT in the UK and the supply of construction services is being made from one business to another.

Under the CIS reverse charge, the VAT due on construction services is reported on the VAT return of the recipient of the services.

The recipient of the construction services is required to include the value of the services on their VAT return in the “output tax” section (i.e. the VAT they have charged on their supplies) and in the “input tax” section (i.e. the VAT they have incurred on their purchases). The input tax is then offset against the output tax, and the recipient pays the difference to HMRC.

It’s important to note that the CIS reverse charge only applies to supplies of construction services made by a business to another business where the recipient is registered for VAT in the UK. If the recipient is not registered for VAT or the supply is being made to a non-business customer, the CIS reverse charge does not apply.