What is the Construction Industry Scheme?

In practice, in the UK

CIS sits alongside the domestic reverse charge as one of the two mechanisms specific to construction, and the two solve different problems: the reverse charge changes who accounts for VAT on a supply, while CIS changes how a subcontractor’s tax is collected, deducting money from the payment itself before it ever reaches the subcontractor’s bank account. Contractors have to verify each subcontractor’s status with HMRC before paying them, since the deduction rate applied depends on that status, and paying a subcontractor without verifying them, or applying the wrong rate, creates a discrepancy that surfaces later when the subcontractor’s own tax position is reconciled. A subcontractor operating as a limited company treats CIS deductions rather differently from one operating as a sole trader, since a company reclaims the deductions against its own PAYE and National Insurance liabilities rather than through a personal tax return.

In Odoo

Odoo needs a way to flag contractor and subcontractor relationships, apply CIS deductions on relevant purchase invoices, and keep a running record of deductions made or suffered, since these figures need to be reported to HMRC and reconciled against the subcontractor’s own tax position. A business acting as both contractor and subcontractor on different jobs needs both sides of this tracked accurately, rather than the system only handling one direction of the relationship.

Common mistakes

• Paying a subcontractor without first verifying their status with HMRC.
• Confusing CIS deductions with the domestic reverse charge, when the two address entirely different things.
• Failing to track CIS deductions suffered as a subcontractor, so they are not properly set against tax owed later.