VAT for CIS starts with determining the end user. A business is defined as an end user if these 3 conditions are satisfed:
1. The Company is VAT Registered
2. Is obliged to process its payments to subcontractors through the CIS; and
3. Does not make onward supplies of the building and construction services that they receive.
If the end-user is an individual customer, then normal VAT rules apply and VAT is charged on the invoice from any contractor/sub-contractor as normal. The builder (Contractor or Sub-contractor) will withhold the VAT and pay it to the HMRC during the normal VAT processes.
If the Contractor is not an End User and VAT applies by the sub-contractor, then the Contractor simply operates the invoice received under the Reverse Charge Mechanism.
Under the reverse charge, the Sub-contractor Issues a VAT invoice informing the CIS Customer that the Reverse Charge Mechanism applies. Contractor then accounts for the transaction with Reverse Charge Rules. The Contractor withholds 20% CIS and pays to HMRC.
If the Contractor is an End User then VAT is applied to the sub-contractor invoice. But CIS is still deducted by the Contractor as they are CIS Registered also. So in effect the sub-contractor gets the net invoice proceeds anyway.
If the customer is an individual and therefore not CIS Registered, the sub-contractor would invoice under normal VAT rules, customer would pay the total invoice (inclusive of VAT) and then the sub-contractor would pass on the VAT to the HMRC.