The VAT Flat Rate Scheme (FRS) is a simplified VAT accounting method for small businesses, but its interaction with CIS subcontractors requires care, and in most cases the DRC removes the FRS benefit for construction supplies.

Under the FRS, a business pays HMRC a fixed percentage of its VAT-inclusive turnover rather than accounting for the difference between output and input VAT. The percentage varies by trade sector. The appeal is lower administration, and sometimes a small cash surplus where the FRS rate is lower than the effective rate implied by the business's input VAT recovery.

The critical interaction with construction: the VAT domestic reverse charge applies only to standard VAT accounting. A subcontractor on the FRS is excluded from the DRC as a supplier, meaning they still charge VAT on their invoices in the normal way (not at 0% with reverse-charge wording). However, HMRC's guidance makes clear that this creates an anomaly: where a main contractor receives a standard VAT invoice from an FRS subcontractor, the main contractor must apply the reverse charge to that supply if the other conditions are met. In practice, this means the main contractor treats the supply as reverse-charged even though the subcontractor invoiced with VAT.

Key practical points for CIS subcontractors on the FRS:

  • The 1% first-year discount on FRS rates applies in the first year of VAT registration only.
  • If most of your work is reverse-charge supplies (to VAT-and-CIS-registered customers who are not end users), you receive no VAT cash on those invoices at all, which removes the main FRS benefit.
  • FRS businesses cannot reclaim input VAT on purchases (other than capital goods over £2,000). For CIS subcontractors buying materials and plant, this can make the FRS unfavourable compared to standard accounting.

Whether the FRS is worthwhile for a CIS subcontractor depends on the mix of end-user and on-supply work, and on materials spend. A CIS accountant should model both scenarios before you join or remain on the scheme. For related reading see our guide to the VAT domestic reverse charge in construction.