Construction company accounting: CIS, VAT and retentions

Construction company accounting differs from other trades in three ways: the Construction Industry Scheme (CIS), the VAT domestic reverse charge and retentions. Each one changes when cash arrives, what goes on the VAT return and how much profit you report. This guide covers the 2026/27 rules for limited companies that work as contractors, subcontractors or both.

How does CIS work for a construction company?

CIS makes contractors deduct tax from payments to subcontractors and pay it to HMRC each month. The deductions count as advance payments towards the subcontractor’s tax and National Insurance.

Apply the rate to the labour element only. GOV.UK says to subtract VAT, materials the subcontractor paid for, plant hire, consumable stores, fuel (except for travel) and manufacturing or prefabrication costs first.

CIS deadlines for contractors

1. Verify each new subcontractor with HMRC before you pay them.
2. Give each subcontractor a payment and deduction statement within 14 days of the end of the tax month.
3. File the monthly return so it reaches HMRC by the 19th. The tax month of 6 May to 5 June is due by 19 June.
4. Pay the deductions by the 22nd if you pay electronically, or the 19th by post.

Late returns cost £100 from day one, £200 at two months and £300 or 5% of the deductions (whichever is higher) at six and 12 months. Our guide to CIS for contractors covers registration.

Reclaiming CIS deducted from your company

A limited company reclaims CIS deducted from its own income through payroll. Send the Employer Payment Summary (EPS) with the year-to-date deductions alongside your Full Payment Submission, and HMRC offsets them against your PAYE bill. Do not claim them on the Corporation Tax return. Unused amounts at the tax year end can be refunded; see CIS refunds.

What changed for CIS in April 2026?

HMRC’s anti-fraud measures took effect on 6 April 2026. If a business knew or should have known a payment was connected to fraud, HMRC can now:

• remove gross payment status immediately
• make the business liable for the lost tax
• charge a penalty of 30% of the lost tax, which can also fall on directors
• bar a reapplication for gross payment status for five years, up from one

To qualify for gross payment status, a company needs net construction turnover (excluding VAT and materials) of £30,000 per director or £100,000 in total over the last 12 months, plus a clean compliance record.

How does the VAT reverse charge work?

Under the domestic reverse charge, the customer, not the supplier, accounts for VAT on most building and construction services. It has applied to invoices with a tax point on or after 1 March 2021.

The technical guide, updated 18 September 2024, says it applies when all of these are true:

• the customer is VAT registered in the UK
• the services are reported within CIS
• the services are standard or reduced rated
• the customer has not told you in writing that it is an end user or intermediary supplier

Which side are you on?

• If you supply reverse charge services, do not charge VAT. Put “reverse charge” on the invoice (for example “Customer to pay the VAT to HMRC”), show the VAT amount or rate, and enter only the net sale on your return.
• If you buy reverse charge services, add the VAT to your output tax and reclaim it as input tax on the same return.
• If your customer is an end user, such as a developer or a client that does not supply construction services onward, normal VAT rules apply once they notify you in writing.

You cannot use the cash accounting scheme for reverse charge supplies. Reverse charge sales are left out of a flat rate scheme calculation, which can make the scheme poor value for a subcontractor. Our VAT hub explains the schemes.

How should you account for retentions?

A retention is part of a payment held back until practical completion or the end of the defects period. It is income you have earned but not yet received.

Profit. HMRC’s Business Income Manual at BIM51520 accepts two approaches: include retentions in turnover with a provision for remedial work and bad debts, or defer them until receipt is virtually certain. Both are acceptable unless the view taken is unrealistically conservative. Periods starting on or after 1 January 2026 also use the revised FRS 102 revenue rules; see FRS 102 changes in 2026.

VAT. Under VATTOS5170, the tax point for a retention is delayed until you issue a VAT invoice for it or receive payment, whichever is first. Stage payment contracts follow similar rules under regulation 93.

Cash. Keep a retentions ledger by contract with the release dates. The Commercial Payments Bill would ban retentions after a transition, but it is not law yet; see the retentions ban.

What to do now

1. Reconcile CIS statements received against the EPS each month.
2. Check every sales invoice carries the right reverse charge wording.
3. Review whether the flat rate scheme still suits you.
4. Agree a written retentions policy with your accountant before the year end.

Frequently asked questions

What CIS rate should I deduct from a subcontractor?

Deduct 20% if they are registered, 30% if they are not registered or HMRC cannot verify them, and nothing if they hold gross payment status. Apply the rate only to the labour part of the invoice.

When is the CIS monthly return due?

It must reach HMRC by the 19th of the month after the tax month ends. The tax month runs from the 6th to the 5th.

Does the reverse charge apply to work for homeowners?

No. The customer must be VAT and CIS registered, so domestic customers are charged VAT in the normal way.

How does a limited company get CIS deductions back?

It claims them on the Employer Payment Summary, and HMRC offsets them against the company’s PAYE bill. Any balance left at the tax year end can be reclaimed as a refund.

When do I pay VAT on a retention?

When you issue a VAT invoice for the retention or receive payment, whichever happens first.