3 February 2026 · 7 min read · Bruce Thomas
Construction generates more accounting complexity per pound of turnover than almost any other sector, and nearly all of it affects cash before it affects profit.
The Construction Industry Scheme
Contractors must verify subcontractors with HMRC before payment, deduct at the rate HMRC confirms, file monthly returns by the 19th and issue deduction statements. Penalties for a late return apply from day one and rise steeply, even where the return is nil.
Gross payment status transforms cash flow for a subcontractor and is worth actively protecting, since the compliance test looks at your recent filing and payment record.
Domestic reverse charge VAT
For most construction services between VAT-registered businesses inside the CIS chain, the customer accounts for the VAT instead of the supplier. Subcontractors therefore stop collecting VAT on sales while still incurring input tax on purchases.
Many businesses in that position are permanently in repayment and would be better on monthly VAT returns, recovering the money four times as often.
Retentions
Retentions of 3–5% held for months after practical completion appear as profit long before they appear as cash. They need a tracking schedule with release dates, and someone whose job it is to chase them.
Work in progress and contract profitability
Uncertified work at the year end must be valued, and the judgement materially affects both reported profit and the tax bill. More importantly, contract-level costing during the job is the only way to spot a loss-making contract while there is still something to be done about it.
Practical steps
- Code every purchase, subcontractor invoice and timesheet to a job
- Compare actual cost to the tender build-up monthly, not at completion
- Invoice variations as they are agreed on site
- Keep a retention schedule with dates and chase discipline
- Review VAT return frequency if you are consistently in repayment
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
