(From Accounting Matters’ point of view)
1. Introduction – Getting It Right Matters
At Accounting Matters, we work with plumbing and heating engineers every single day, and two topics come up more than any others when it comes to tax compliance:
CIS (the Construction Industry Scheme) and the Domestic Reverse Charge VAT Scheme.
Both are essential parts of working within the construction sector, but they’re also among the most misunderstood.
We’ve seen good tradespeople accidentally overpay tax, lose cash flow, or even face HMRC penalties simply because the rules weren’t explained to them properly.
The good news? Once you understand how these schemes work—and have the right systems in place—they’re nothing to fear.
Here’s how they apply to your plumbing or heating business, and how we at Accounting Matters make sure you stay compliant and confident all year round.
2. Understanding CIS – The Construction Industry Scheme
The Construction Industry Scheme (CIS) was introduced by HMRC to ensure that tax is correctly deducted from payments made to subcontractors who carry out construction work.
This includes plumbing, heating, electrical, roofing, and general building services.
Who CIS applies to
If you:
- Work as a subcontractor providing labour to another contractor, or
- Hire subcontractors to help on your own jobs,
then CIS applies to you.
CIS registration
Both contractors and subcontractors must register with HMRC:
- Contractors must verify subcontractors through HMRC before making payments.
- Subcontractors who register are taxed at 20%, while unregistered ones are taxed at 30%.
You can register online or through your accountant — we handle this process for our clients to ensure correct setup from day one.
3. How CIS Works in Practice
Let’s say you’re a heating engineer working for a main contractor fitting out a new housing development.
The contractor pays you £2,000 for your labour, but under CIS they must deduct 20% (£400) and pay that to HMRC on your behalf.
You receive £1,600 and get a CIS deduction certificate showing what was withheld.
At the end of the tax year, those deductions count as advance payments toward your income tax and National Insurance.
If too much has been deducted, we’ll claim a CIS refund from HMRC for you.
If you employ subcontractors yourself, you’ll need to:
- Register as a CIS contractor,
- Verify each subcontractor, and
- Submit monthly CIS returns to HMRC (by the 19th of each month following payment).
Late returns can trigger penalties starting at £100, so timeliness is key.
At Accounting Matters, we file these returns for our clients through our secure HMRC-approved agent portal — ensuring deadlines are met and deductions are correct.
4. Common CIS Mistakes We See (and Fix)
We’ve seen all sorts of errors when new clients come to us, including:
❌ Contractors deducting the wrong amount
❌ Subcontractors registered incorrectly under CIS
❌ Missed CIS returns or penalties for late filing
❌ Duplicate deductions not reconciled at year-end
❌ Materials incorrectly included in CIS calculations
HMRC legislation (CISR 200 to CISR 90000) clearly states that deductions only apply to the labour element of payments — not to materials, plant hire, or fuel costs.
We make sure your records split these correctly so you don’t overpay tax or invite an HMRC query.
5. What the Domestic Reverse Charge VAT Scheme Means
Now, let’s move on to the Domestic Reverse Charge (DRC) for VAT, which came into effect on 1 March 2021 and continues to apply in 2025/26.
It fundamentally changed how VAT is handled for many construction services — including plumbing and heating work.
The purpose
HMRC introduced the reverse charge to combat VAT fraud within the construction industry, where some subcontractors were charging VAT but not passing it on.
Who it applies to
The DRC applies when:
- Both the supplier and customer are VAT-registered;
- The work is within the scope of CIS; and
- The supply is not to the end user (for example, you’re working for another contractor, not the homeowner).
In those cases, you no longer charge VAT to your customer — instead, the customer accounts for VAT on their own VAT return.
6. How the Reverse Charge Works in Real Life
Example:
You’re a VAT-registered plumbing company supplying labour and materials to a main contractor fitting out a block of flats.
Previously, you’d raise an invoice for £5,000 + £1,000 VAT = £6,000 total.
Now, under the Domestic Reverse Charge, you invoice for £5,000 only and state clearly that:
“VAT reverse charge applies. Customer to account for output VAT at the standard rate to HMRC.”
You still record the transaction in your books, but no VAT changes hands between you and the contractor.
The contractor declares both the input and output VAT on their own return, keeping HMRC happy and reducing the risk of “missing trader” fraud.
7. When the Reverse Charge Doesn’t Apply
The reverse charge does not apply when:
- You’re working for a homeowner or domestic customer.
- The work is zero-rated (for example, new build housing).
- The customer is not VAT-registered.
- You’re supplying materials only, not construction services.
In these cases, you charge VAT as normal.
We always remind clients to confirm each customer’s VAT status before invoicing — one quick check can save a lot of accounting confusion later.
8. The Link Between CIS and DRC
Many plumbing and heating engineers fall under both CIS and the reverse charge.
If you’re VAT-registered and working for another contractor under CIS, then both schemes apply:
- You must deduct CIS from the payment to your subcontractor, and
- You must apply the reverse charge to the VAT on your invoice.
It’s easy to make mistakes here, which can lead to under- or over-reporting to HMRC.
That’s why we set up dedicated invoice templates and Xero rules for our trade clients so these processes happen automatically.
9. What HMRC Expects You to Do
According to HMRC Notice 735 (Section 5), businesses affected by the Domestic Reverse Charge must:
- Check that their customers are VAT and CIS registered.
- Clearly state on invoices when the reverse charge applies.
- Keep digital records showing why reverse charge was used.
- Report these transactions accurately on VAT returns (Boxes 1, 4, and 7 on the VAT100).
Failure to comply can lead to assessments, penalties, or loss of credibility in an HMRC audit.
We make sure our clients meet all these obligations automatically by linking their CIS and VAT processes through Xero, Dext, and BrightPay, so data flows correctly from start to finish.
10. How Accounting Matters Helps You Stay Compliant
Here’s how we handle it for our plumbing and heating clients:
- CIS setup and verification – We register you correctly with HMRC and verify all subcontractors each month.
- Monthly CIS returns – Submitted on time every time, avoiding penalties.
- Reverse charge training – We show you how to issue compliant invoices.
- Xero configuration – We set your accounting software to automatically handle reverse charge VAT postings.
- Quarterly reviews – Ensuring VAT and CIS reports match your job activity.
- HMRC correspondence – We handle queries directly so you don’t have to.
Because both schemes tie directly to tax compliance, we make sure your business meets current HMRC guidance (as of 2025) — giving you total peace of mind.
11. Common Questions from Engineers
Q: I buy boilers and materials – do these fall under CIS or reverse charge?
A: Materials are excluded from CIS deductions and are not subject to the reverse charge unless they form part of a labour-inclusive invoice under CIS.
Q: Do I need to apply the reverse charge if I’m working for a local homeowner?
A: No. If your customer is a private individual or end user, you charge VAT as normal.
Q: Can I still reclaim VAT on my purchases?
A: Yes. You still reclaim input VAT on your costs even if you’re not charging output VAT under the reverse charge.
Q: What happens if I apply the wrong VAT treatment?
A: HMRC may issue an assessment or penalty. However, if the mistake was genuine and corrected promptly, it can often be resolved without issue — that’s why we review client VAT returns before submission.
12. The Accounting Matters Difference
We’ve built our entire trade-specialist service around making sure schemes like CIS and the reverse charge are not stressful for our clients.
Our team uses trade-specific checklists, up-to-date HMRC resources, and internal reviews to ensure full compliance.
We know exactly what HMRC is looking for during a CIS or VAT inspection, and we keep your records ready and accurate all year round.
We don’t believe in “just filing forms.” We believe in helping you understand why things are done a certain way so you can make informed decisions about your business.
When you call Accounting Matters, you speak to someone who actually understands the difference between a boiler installation and a subcontract labour job—and that makes all the difference.
13. Final Thoughts – Stay Compliant, Stay in Control
CIS and the Domestic Reverse Charge VAT Scheme aren’t optional—they’re HMRC law.
But with the right accountant and the right systems, they become just another part of running your business efficiently and compliantly.
At Accounting Matters, we combine real-world trade understanding with up-to-date tax knowledge so our plumbing and heating clients can focus on what they do best — keeping homes warm and water flowing — while we keep HMRC satisfied.
14. Let’s Get Your CIS & VAT Right from the Start
If you’re unsure whether you’re applying the CIS or reverse charge rules correctly, or you’ve never had your processes reviewed, now is the perfect time to get it sorted.
📞 Call us: 01773 747990
📧 Email: welcome@accountingmatters.co.uk
🌍 Visit: www.accountingmatters.co.uk
We’ll check your setup, bring everything in line with HMRC’s current legislation, and make sure your business stays protected, compliant, and confident.
Because when it comes to tax and trade, Accounting Matters — and compliance always comes first.