Retentions are a headache for any small construction company. They're very common and often hard to avoid. This blog will ensure that you're accounting for retentions in construction correctly. So at least that's one problem off the list!
Retentions are a percentage of a construction contract, often 5%, which are held back and not paid until a later date. Main contractors often insist on these as a way of mitigating themselves against snagging and defects in the work that's been completed.
The total amount relating to a contract needs to be included as income on completion. Watch our video tutorial to see our recommended method of recording retentions. This method records the total income but splits the retention into a separate balance sheet code to keep your debtors current and tidy.
Corporation tax will be payable on the full amount even though the retention hasn't been collected. It's therefore important that the retentions account is reviewed periodically but especially at the company year-end.
A bad debt provision could be included in your accounts when it becomes unlikely that a retention will be recovered in the future. This means corporation tax wouldn't be payable on it.
For VAT, the tax point for retentions is delayed until the earlier of the following:
This means that you don't pay over the VAT to HMRC until the retention is invoiced/ received at a later date. If you're interested you can check out the HMRC guidance for this here.
If your income is subject to CIS then you'll operate under the reverse charge for construction, which means the VAT position will be irrelevant anyway.
CIS works on a cash basis and so will only be suffered on monies actually received.
The below table shows how your invoice should be laid out:
| £ | ||
| Gross payment: | Labour | 50,000 |
| Materials | 15,000 | |
| Retention @ 5% | (3,250) | |
| Subtotal | 61,750 | |
| VAT @ 20% (Reverse charge for construction £12,350) | - | |
| CIS tax deducted | (9,500) | |
| Payment due | 52,250 |
If you suffer retentions and use Xero for your accounting, you'll know that there's no specific way of dealing with them. We've put together this video to give guidance on how to account for them.
Note: A slightly different process needs to be followed if you suffer CIS on your income. Please contact us for more information.
If you'd like to speak to us regarding retentions or other accounting issues in your construction company, book a free 15-minute discovery call to find out how we can help.
