CIS & Domestic Reverse Charge VAT with Xero: Project-Side Steps That Prevent AP Headaches

For the full workflow, see CIS & Reverse Charge VAT — only approved, fully coded bills sync.

What changes with CIS and Domestic Reverse Charge (DRC) in Xero?

CIS in Xero

Xero lets contractors verify subcontractors, calculate CIS deductions, file the monthly CIS return, and email payment & deduction statements (bulk or one-by-one). Enabling CIS in Xero exposes the right account codes and reports; the CIS contractor add-on enables in-product filing and bulk statements.

DRC VAT

For most CIS-reportable construction services at 20% or 5% VAT, the customer (contractor) accounts for VAT instead of the supplier. It’s been in force since 1 March 2021 and has no minimum threshold.

Where it lands on the VAT return

With Xero’s DRC tax rates applied correctly:

• Contractor receiving a DRC bill: VAT is posted to Box 1 and reclaimed in Box 4 (subject to normal rules); the net purchase goes to Box 7.
• Subcontractor issuing a DRC invoice: value appears in Box 6 only (no Box 1 VAT).

Configuration checklist (no-nonsense)

• Enable CIS in your organisation so CIS codes/reports appear; add the CIS contractor add-on if you want in-product HMRC filing, verification and bulk statement emails.
• Add Xero’s DRC tax rates: Accounting → Advanced → Tax rates → Add Domestic Reverse Charge Tax Rates. Note: the non-MTD VAT return in Xero doesn’t support DRC—use MTD VAT.
• Use MTD VAT so DRC entries feed the right boxes automatically.

Coding patterns that keep AP tidy

Bills from subcontractors (contractor viewpoint). Apply the appropriate DRC rate on each bill line that’s in scope; verify the subcontractor and let Xero calculate CIS on payment. These postings flow into CIS and VAT returns.

Invoices raised by subcontractors. Issue a DRC invoice (no VAT charged) with clear reverse-charge wording—Xero supports the wording and displays the rate.

Mixed supplies. Treat line-by-line—only qualifying construction services are subject to DRC.

When DRC doesn’t apply. End-user scenarios and certain professional services (e.g., architects/surveyors) are outside scope; standard VAT rules apply.

Role-based workflow (Project vs Accounting)

Project teams (PM/QS):

• Ensure supplier quotes and subcontract orders flag where DRC applies.
• Collect correct CIS info early and pass the verified rate to AP.

Accounts Payable:

• Check bills for DRC wording and apply the DRC tax rate to relevant lines.
• Run the CIS return, submit to HMRC, and bulk email CIS statements (by the 19th of the following month).

Financial controller:

• Review MTD VAT return; confirm Box 1/4/7 and any Box 6 supplier activity look right for the period.

Scenario quick-reference (how it looks in Xero)

Common mistakes (and quick fixes)

Using a non-MTD VAT return for DRC

Fix: Switch the org to MTD VAT and use Xero’s Domestic Reverse Charge tax rates—Xero’s non-MTD VAT return doesn’t support DRC at all.

Why it matters: With MTD enabled, DRC postings land correctly (typically Box 1 output tax under reverse charge, Box 4 input tax reclaimed subject to rules, and Box 7 net purchases), so your return reconciles.

Prevent it: Add a VAT pre-flight check: open the draft and confirm Boxes 1/4/7 are populated for sample DRC bills before filing. Xero’s DRC rates are designed to feed the MTD return automatically.

Applying DRC to the whole bill when only part qualifies

Fix: Code line-by-line—apply DRC only to qualifying construction services at 20% or 5%; use standard (or zero/exempt) on non-qualifying items.

Why it matters: DRC scope follows CIS-type construction services; professional services and end-user cases usually sit outside DRC, so blanket-coding creates wrong VAT box totals.

Prevent it: Create “mixed invoice” templates (labour-only, labour+materials, mixed) and add a reviewer step for any bill with both qualifying and non-qualifying lines; keep a one-pager listing common exclusions and end-user scenarios.

Missing CIS statements

Fix: After preparing/filing the CIS return, bulk email payment & deduction statements to all affected subcontractors directly from Xero.

Why it matters: Contractors must issue statements within 14 days of the end of the tax month (i.e., by the 19th); missing them triggers queries and risks penalties.

Prevent it: Add a calendar task for the 19th, keep contact emails current in supplier records, and re-issue promptly on request; if a contractor is unavailable, subcontractors can obtain details from HMRC via a postal request as a fallback.

Why project-side control matters (and where Planyard fits)

CIS and DRC are only painless when bills are fully coded and approved before they hit Xero. Planyard lets you collect quotes, issue POs/subcontracts, manage progress claims, and approve invoices against budgets—then sync approved, DRC-ready bills to Xero so CIS and VAT returns reconcile cleanly.

Keep AP compliant and calm. Connect Planyard to Xero so only approved, fully coded bills hit your ledger—CIS deductions, DRC VAT, and statements included.