How does CIS accounting work for a construction business?

A CIS-registered construction business has deductions taken from payments by contractors, applies the domestic reverse charge to VAT on most subcontractor invoices, and accounts for retentions held back until practical completion, all before the usual corporation tax and payroll work.

Contractors deduct 20% or 30% from a subcontractor's payment and pay it to HMRC, so a limited company subcontractor sees the deduction as tax already paid on account, offset against its corporation tax or, if it also runs payroll, reclaimed through the employer's payment summary against PAYE and National Insurance due. Missed reconciliations here are one of the most common ways a construction company loses money it is owed.

Verification status matters too: a subcontractor not verified with HMRC is deducted at 30% rather than 20%, and gross payment status, once obtained, removes deductions altogether but comes with turnover and compliance conditions that HMRC reviews.

Since 2021, most standard or reduced-rated construction services between VAT-registered subcontractors and contractors are subject to the domestic reverse charge: the subcontractor invoices without VAT, and the contractor accounts for both the output and input VAT on their own return. Getting this wrong means either undercharging VAT you should have collected or charging VAT you should not have.

Retentions, typically 3-5% of a contract value held back until defects liability periods end, are still income of the business when earned, even though the cash is not received for months, so the accounts need a debtor for retentions held and a clear note of when each tranche falls due.

Rates, thresholds and deadlines quoted here reflect the 2026/27 UK position and current Companies House and HMRC guidance. Check GOV.UK, or ask us, before relying on them for your own company.