Sector
Construction subcontractors: retentions and CIS
A subcontractor rarely receives the full value of the work it has done when it's paid for it. The Construction Industry Scheme takes a tax deduction off the payment before it arrives, and a retention holds back a slice of the sum itself until the job is finished and the defects period has run. They come from different places, they're resolved in different ways, and on a live contract book they stack.
How money moves
One payment, split three ways before it lands
When a sum becomes due to a subcontractor, part is held back as retention, part is deducted and sent to HMRC under CIS, and the rest is paid. Each part comes back to the business on a different timetable, or not at all.
The paymentIncome
- Work done and a sum becomes due under the contract
- Contractor takes off VAT, materials and certain other costs
- Deducts CIS at 20%, 30% or 0% from what's left
- Pays the net amount
The CIS deductionTax paid in advance
- Contractor pays it to HMRC
- Counts as an advance payment towards the subcontractor's tax
- A company sets it against its payroll taxes; a sole trader gets it credited in Self Assessment after the tax year
The retentionHeld back
- Typically 5% of the amount due, held by the party above
- First half released at completion
- Second half released after the defects liability period
Wages, materials and plant are paid on the gross job. What arrives is the net payment, with the tax recovered later and the retention released later still.
The government's 2017 consultation on retentions describes the practice as holding "a percentage (typically 5%) of the amount due for payment", with the first half customarily released at completion and the other half after "a defects liability period (typically 12 to 24 months)". It also found that most holders keep retentions in a main bank account, so for contractors "retention monies held against their work are not typically ring-fenced" (Retention payments in the construction industry, consultation document).
Where the sector gets misread
What a generalist lender sees, and what's actually happening
Cash received well below certified value
CIS deductions count as advance payments towards the subcontractor's tax and National Insurance. For a limited company, HMRC takes them off what the company owes through its payroll scheme, so the money isn't lost, it's been paid early.
A retention as a dispute or a bad debt
Retention is written into most construction contracts and released in two stages. It's earned money on a fixed release timetable. The real risk is the holder's solvency, because the money usually isn't ring-fenced.
An application for payment as an invoice
The contract has to set out what becomes due, and when. Until a sum is due under that mechanism, there's no debt for a funder to advance against, however much work has been done.
The measure that matters
Net receipts, not certified value
The useful picture is what actually arrives from each certified pound, and where the rest has gone: CIS deducted so far this year and not yet set against tax, retention held on each contract with its release dates, and sums applied for that haven't yet become due.
Two subcontractors with the same turnover and the same main contractors can have very different fundable positions, purely because of their CIS status and where their work sits between application, due date and retention release.
Where finance fits
Invoice finance once a sum is due, a credit line for the recurring squeeze
A facility can carry a retention until its release date. It can't recover one held by a contractor that has gone insolvent.
On the CIS side, the durable fix is often gross payment status rather than financing around deductions indefinitely. HMRC looks at tax compliance, whether the business does construction work in the UK through a bank account, and turnover over the last 12 months, ignoring VAT and materials: at least £30,000 for a sole trader, and £30,000 per partner or director or £100,000 in total for partnerships and companies.
Sources
Where these points come from
- CIS ratesGOV.UK: what you must do as a CIS contractor, make deductions and pay subcontractors
- Claiming backGOV.UK: what you must do as a CIS subcontractor, pay tax and claim back deductions
- Gross paymentGOV.UK: how to get gross payment status
- RetentionsGOV.UK: retention payments in the construction industry, consultation (2017) and summary of responses (2020)
- Payment termsHousing Grants, Construction and Regeneration Act 1996, section 110
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Adam Parker
Founder of Muswell Rose Consulting Ltd, which trades as Established Finance · former Managing Director of Penny, an invoice finance business, with 15+ years across mortgages, commercial finance and fintech lending.
Last updated:
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