HMRC & CIS: A plain-English guide

Everything UK tradespeople need to know about CIS, VAT, and HMRC compliance — and how FlashBill handles it automatically.

What is CIS?

The Construction Industry Scheme (CIS) is a HMRC tax deduction scheme for contractors and subcontractors working in the UK construction industry.

Under CIS, contractors must deduct money from a subcontractor's payments and pass it to HMRC. The deduction rate is:

  • 20% — for registered subcontractors (most common)
  • 30% — for unregistered subcontractors
  • 0% — for subcontractors with gross payment status

CIS deductions only apply to the labour element of a subcontractor's invoice — not materials.

CIS + VAT: The 6 combinations

When CIS and VAT interact, there are 6 possible tax combinations — known as TC-01 through TC-06. Getting these wrong is one of the most common errors on CIS invoices.

TC-01Labour only, 20% VAT, 20% CIS
TC-02Labour + materials, 20% VAT, 20% CIS on labour
TC-03Labour only, reverse charge VAT, 20% CIS
TC-04Labour + materials, reverse charge, 20% CIS on labour
TC-05Labour only, 0% / exempt VAT, 20% CIS
TC-06Labour + materials, 0% / exempt VAT, 20% CIS on labour

FlashBill calculates all 6 combinations automatically — just tick "CIS invoice", enter the labour and material amounts, and FlashBill does the rest.

VAT Domestic Reverse Charge (DRC)

Since 1 March 2021, most CIS-registered construction businesses must apply the Domestic Reverse Charge for VAT on construction services.

Under DRC, instead of the subcontractor charging VAT, the contractor accounts for VAT directly to HMRC. This means:

  • The subcontractor does not collect or pay VAT to HMRC on these supplies
  • The contractor accounts for the VAT on their VAT return
  • The invoice must clearly state "Reverse charge: customer to account for VAT"

FlashBill adds the required reverse charge notice to your invoice automatically when enabled.

CIS Statements

Contractors are legally required to provide subcontractors with a CIS deduction statement each month, showing the gross amount, the deduction made, and the net amount paid.

FlashBill generates CIS Statement PDFs for your accountant — available on Pro and Business plans.

Late Payment Act

The Late Payment of Commercial Debts (Interest) Act 1998 entitles UK businesses to charge interest and a fixed compensation fee when commercial debts are paid late.

  • Interest: Bank of England base rate + 8%
  • Fixed compensation: £40 (invoices up to £999.99), £70 (£1,000–£9,999.99), £100 (£10,000+)

FlashBill can generate a statutory Late Payment notice with correctly calculated interest in one click — ready to send to overdue clients.

Making Tax Digital (MTD)

HMRC's Making Tax Digital initiative requires VAT-registered businesses to keep digital records and submit VAT returns through MTD-compatible software.

FlashBill's Xero export (Pro & Business plans) lets you export your invoices in a Xero-compatible CSV format for seamless reconciliation with your accountant's MTD-compliant software.

Direct MTD submission is on our roadmap. See the roadmap →

Questions about CIS or VAT on your invoices?

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