Setting up CIS and the reverse charge in Xero

To set up CIS in Xero, turn on the CIS settings for your organisation as a contractor, a subcontractor or both, add the domestic reverse charge (DRC) tax rates, and mark each subbie or contractor contact with their CIS details. Contractors need the Ignite plan or above, plus Xero's £5 a month CIS add-on to verify subbies and file returns to HMRC.

What do you need before you start?

You need a Xero plan that suits your volume, your HMRC details and your subbies' details to hand. As of October 2026, Xero's UK pricing page lists Ignite at £18 a month, Grow £39, Comprehensive £55 and Ultimate £70 (excluding VAT, with discounted first months). Ignite caps you at 10 bills and 20 invoices a month, which a contractor with a few regular subbies can pass quickly.

Verifying subcontractors with HMRC, filing monthly CIS returns from Xero and emailing statements in bulk cost an extra £5 a month on any plan.

How do you set up CIS as a subcontractor?

Turn on CIS as a subcontractor in your organisation's settings. Xero then uses CIS account codes to apply the deduction to your sales invoices, and the CIS suffered report shows what your contractors have taken off. You keep invoicing as normal.

1. Turn on CIS for your organisation.

   Choose subcontractor (and contractor too, if you pay subbies yourself). This adds the CIS account codes.

2. Enter your CIS rate.

   The rate HMRC applies to you: 20% registered, 30% unregistered, 0% with gross payment status.

3. Mark each contractor contact as a CIS contractor.

   So invoices to them show the deduction, and invoices to homeowners don't.

4. Put labour and materials on separate lines.

   The deduction only comes off labour. A single "supply and fit" line gets deducted in full.

5. Match payments to statements.

   When the contractor pays net, record the deduction against their monthly payment and deduction statement, and keep the statement.

How do you set up CIS as a contractor?

You need CIS turned on as a contractor and the add-on to verify and file. Add or import each subbie as a contact, enter their UTR and expected rate, and verify them with HMRC through Xero. When you enter a subbie's bill, Xero works out the deduction from the labour lines.

1. Turn on CIS as a contractor and subscribe to the CIS add-on.

   Enter your contractor details (UTR and accounts office reference).

2. Add each subcontractor as a contact.

   Enter their UTR and expected deduction rate, then verify them through Xero.

3. Enter bills with labour and materials split.

   Use the CIS labour and materials account codes your accountant agrees.

4. Review the monthly CIS return.

   Check each subbie's gross payment, materials and deduction before you file.

5. File by the 19th and send statements.

   File the return to HMRC from Xero and email statements to subbies. In a month with no payments, file a nil return.

How do you add the reverse charge tax rates?

Xero's guidance says to open Tax Rates under Advanced Accounting and choose "Add Domestic Reverse Charge Rates". That adds rates for income and expenses at 20% and 5%, shown on invoices as "Domestic Reverse Charge @ 20% (VAT on Income)". Subbies use the "on Income" rates on sales invoices to VAT-registered contractors; contractors use the "on Expenses" rates on bills. Xero adds a note to the invoice telling the customer to account for the VAT. Menus change, so check Xero Central's "Domestic Reverse Charge in Xero" article if your screen looks different.

Worked example

Checking your first reverse charge invoice and bill

A VAT-registered electrical subbie (CIS registered, 20%) invoices a builder for first-fix on a house extension.

LabourDomestic Reverse Charge @ 20% (VAT on Income)	£6,000
Materials (cable, back boxes, consumer unit)same tax rate	£1,500
Invoice total before VAT	£7,500
VAT added to the totalreverse charge	£0
CIS deduction shown20% × £6,000 labour	−£1,200
Builder pays the subbie£7,500 − £1,200	£6,300
Builder's VAT returnbox 1 £1,500 and box 4 £1,500 (20% × £7,500); box 7 £7,500	nets to £0
Subbie's VAT returnbox 6 £7,500, nothing in box 1	£0

It's a lot of money, isn't it?

That firm already had supplier invoices flowing through Dext into Xero, and its question was whether the reverse charge would be applied automatically to the right invoices. Xero applies whatever tax rate sits on the line. Getting the right rate on the right customer is still a decision someone has to make, every time.

What goes wrong most often?

Most errors come from contacts and lines, not settings. A homeowner set up as a CIS contractor gets a deduction on their invoice. A "supply and fit" single line gets the deduction taken off materials. A customer who sent an end user notice still gets a reverse charge invoice. And Cash Accounting users should know reverse charge supplies can't go through that scheme.

Xero's screens and plan prices change. Check Xero's own pricing page and Xero Central before you subscribe, and ask your accountant to confirm the account codes.

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Where Nexley fits

Nexley is the AI back office for UK trade firms: five AI assistants run your tenders, quotes, buying, scheduling and invoicing. It connects to the tools you already work in, you run it all from WhatsApp, and you approve everything. £799 a month.

For CIS and VAT in Xero, Nexley reads each subbie's invoice from WhatsApp or email, splits labour from materials, picks the right DRC tax rate and CIS treatment for that contact, and posts the draft bill to Xero. On your own sales invoices it does the same for each customer. You approve before anything is posted or sent.

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Common questions

Sources

1. Xero: File your CIS returns online
2. Xero: VAT domestic reverse charge software
3. Xero blog: Preparing your business for the VAT domestic reverse charge
4. Xero: Your guide to domestic reverse charge VAT for construction (PDF)
5. GOV.UK: VAT domestic reverse charge technical guide
6. GOV.UK: Domestic reverse charge procedure (VAT Notice 735)
7. GOV.UK: Make deductions and pay subcontractors

Every rule, rate and date above was checked against these sources on the date shown at the top.