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Free guide · Reviewed July 2026

The UK Trade's VAT & CIS Guide

VAT, the Domestic Reverse Charge and CIS decide how much of a job's money actually reaches you — and one wrong rate can cost more than a bad week on site. Here's how each rule works, where trades get caught out, and how to get all three right before the quote goes out.

Part 1VAT: the basics every trade needs

VAT (Value Added Tax) is a tax on most goods and services. For a tradesperson it comes down to two questions: do you have to register, and which rate goes on each job. Get those two right and most of the VAT worry disappears.

When do I have to register?

You must register for VAT once your taxable turnover passes £90,000 in any rolling 12-month period (the threshold since April 2024, so check it hasn't moved), or as soon as you expect to pass it in the next 30 days alone. One big contract can trigger that on its own. You can also register voluntarily below the threshold, which can be worth it if you mainly work for VAT-registered businesses or buy a lot of materials.

Once registered, you add VAT to your invoices, hand it to HMRC, and reclaim the VAT you pay on materials and business costs. Don't skim past that last part: the reclaim is real money, and it's the half of VAT that works in your favour.

Watch the thresholdIt's a rolling 12 months, not your tax year. A few big jobs close together can push you over without warning, so keep an eye on your last-12-months total, not just the current year.

The Flat Rate Scheme: simpler, but do the sums

If your turnover is under £150,000 (excluding VAT), you can join the Flat Rate Scheme: instead of tracking VAT on every purchase, you pay HMRC a fixed percentage of your VAT-inclusive turnover and keep the difference. Two catches. First, you can't reclaim VAT on most purchases, so if you buy a lot of materials it usually costs you more than it saves. Second, if you buy few materials (goods under 2% of turnover, or under £1,000 a year), HMRC classes you as a "limited cost trader" and forces you onto a punitive 16.5% rate that wipes out the benefit, so the scheme rarely pays for labour-only trades either. Run the numbers both ways, or ask your accountant, before you commit.

Making Tax Digital is not optional

Every VAT-registered business must now keep digital records and file VAT returns through MTD-compatible software. Paper records and manual HMRC entry are no longer allowed. If you're registering for the first time, get this set up from day one.

Part 2Which VAT rate for which job

There isn't one "building rate". The work itself decides the rate. The big three:

RateWhen it typically applies
20%
Standard		Most work: repairs, maintenance, extensions and alterations to existing homes, and nearly all commercial work. If none of the special cases below fit, it's almost certainly 20%.
5%
Reduced		Converting a property into a different number of dwellings (e.g. a house into flats), converting non-residential into residential, or renovating a home that's been empty for 2+ years. Strict conditions apply.
0%
Zero-rated		Building a new dwelling from scratch, and certain new-build charitable work. Also: installing qualifying energy-saving materials in homes (zero-rated in Great Britain until 31 March 2027, then 5%).
The trapCharging 20% on a job that qualifies for 5% or 0% can cost your customer thousands — and lose you the job to the trade who knew the right rate. Zero-rated and reduced-rate work has tight conditions and usually needs evidence (planning consent, an empty-property certificate, etc.). When a job looks like new-build, a conversion or a long-empty renovation, confirm the rate before you quote.

Part 3The Domestic Reverse Charge

The VAT Domestic Reverse Charge (DRC) for construction came in on 1 March 2021 and catches a lot of subcontractors out. It changes who pays the VAT to HMRC on certain B2B construction jobs.

How it normally works vs the reverse charge

Normally you add VAT to your invoice and pass it to HMRC. Under the reverse charge, you don't charge the VAT at all: your customer accounts for it directly to HMRC instead. You invoice for the net amount and state that the reverse charge applies.

When does it apply?

All of these must be true:

  • The work falls within CIS (see Part 4), and
  • Both you and your customer are VAT-registered, and
  • Your customer is also CIS-registered, and
  • Your customer is not the "end user": i.e. they're buying your work to supply it on as construction services, rather than receiving it for their own use (a developer or landlord can be an end user without occupying the building), and
  • The supply is standard (20%) or reduced (5%) rated, not zero-rated.
Two things to get right1. Domestic customers and end users are NOT reverse charge: you charge VAT the normal way. The "domestic" in the name is misleading; it's really a business-to-business rule. 2. Your invoice must say so. Clearly state "Reverse charge: customer to account for VAT to HMRC" and show the VAT rate/amount they must account for (without adding it to the total).

Two rules that decide the close calls

The end-user notice. It's the customer's job to tell you, in writing, if they're an end user (or a connected "intermediary supplier"). If they don't tell you, the reverse charge applies by default, so the cost of their silence is theirs, not yours. Keep that written confirmation on file; it's your evidence if HMRC asks why you didn't charge VAT.

The 5% disregard. If the reverse-charge element is only a small part of a larger job (5% or less of the total value), you can disregard it and treat the whole invoice as normal VAT. Stops a tiny bit of qualifying work dragging a big standard job into the reverse charge.

Part 4CIS: the Construction Industry Scheme

CIS is HMRC's system for construction payments between businesses. Under it, a contractor deducts money from a subcontractor's payment and sends it to HMRC as an advance towards the subcontractor's tax and National Insurance.

Working as a subcontractor?This section is the overview. For the full subcontractor's side, covering registering, the labour/materials split, deduction statements and getting your money back, see our dedicated guide: CIS for Subcontractors, Explained Simply.

The deduction rates

RateApplies to
0%Subcontractors with gross payment status: paid in full, they settle their own tax later.
20%Subcontractors registered with CIS and verified by the contractor.
30%Subcontractors not registered, or who can't be verified. Register to drop to 20%.

Deducted from labour, not materials

This is the one trades most often get wrong. CIS is deducted only from the labour and non-material part of the payment. The direct cost of materials (and plant hire, fuel for plant, etc.) is excluded and paid in full. If you lump materials in with labour, too much gets deducted and you're chasing it back from HMRC.

If you're the contractorVerify each subcontractor with HMRC before you pay them, file a monthly CIS return by the 19th, give subcontractors a deduction statement, and pay what you've withheld over to HMRC. Miss a monthly return and the penalties stack up fast.

Now live: Making Tax Digital for Income Tax

This one is separate from the MTD-for-VAT rules in Part 1. Making Tax Digital (MTD) for Income Tax is live now: it began on 6 April 2026 for sole traders and landlords with qualifying income over £50,000, extending to those over £30,000 from April 2027, and to those over £20,000 from April 2028. The CIS rates and the labour-vs-materials split above don't change. What changes is the admin: affected subcontractors keep digital records and send HMRC quarterly updates through compatible software, rather than relying on a single year-end return. If you work under CIS, check whether MTD applies to you yet and that your bookkeeping is ready for it — our Making Tax Digital guide has the thresholds, deadlines and penalties in full.

Part 5Five mistakes that cost trades money

Most of the money lost to these rules doesn't go in fines. It goes in small, avoidable mistakes like these:

  • Charging VAT when the reverse charge applies (or the other way round). Wrong either way, and awkward to unpick after the invoice has gone out.
  • Deducting CIS on the materials as well as the labour, over-deducting, then having to reclaim.
  • Using 20% on a 5% conversion or a 0% new build, overcharging your customer and losing the job to someone who got it right.
  • Drifting over the £90k threshold without noticing, because you watched the tax year instead of the rolling 12 months.
  • Nothing in writing. The rate, the reverse-charge status and the CIS treatment should all be clear on a signed quote, so there's no argument at invoice time.

Part 6Your quick checklist

Before you send your next quote, run through this:

  • Am I over (or close to) the £90,000 VAT threshold on a rolling 12-month basis?
  • What's the correct VAT rate for this job: 20%, 5% or 0%? Do I have the evidence?
  • Is my customer a business passing the work on (reverse charge) or the end user/a homeowner (normal VAT)?
  • Does the work fall within CIS, and is the subcontractor verified and at the right rate?
  • Have I split materials from labour so CIS is deducted correctly?
  • Is all of it written clearly on the quote, ready to be signed?

Get the tax right
without thinking about it.

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More free guides

CIS for Subcontractors →The Construction Industry Scheme in plain English: the rates, the labour/materials split, and getting your money back. How to Price a Job and Not Lose Money →Hidden costs, markup vs margin, and recovering the overheads you forget. Getting Paid On Time →Deposits, payment terms, late-payment interest and what to do when an invoice goes quiet. All free guides →Every TradeDraft guide in one place: pricing, quoting, VAT, CIS and getting paid.

This guide is general information for UK tradespeople, current to the best of our knowledge in 2026. Tax rules, rates and thresholds change, and how they apply depends on your specific circumstances. It is not tax, accounting or legal advice. Always confirm your position with HMRC or a qualified accountant before relying on it. TradeDraft accepts no liability for decisions made on the basis of this guide. Questions: hello@tradedraft.co.uk.

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