Running the books for a construction or trades business is rarely as simple as recording sales and expenses. Whether you are a sole trader plasterer, a groundworks subcontractor or a limited company main contractor, you have to deal with the Construction Industry Scheme (CIS), the domestic VAT reverse charge, retentions, stage payments and the constant push and pull on cash flow. Get the bookkeeping right and you will price work profitably, stay on the right side of HMRC and avoid the nasty surprises that sink so many otherwise busy firms. This guide walks through the accounting that matters most on the tools.
How trades accounting is different
Most service businesses invoice, get paid and move on. Construction is messier. A single job can run for weeks or months, involve materials bought up front, labour from subcontractors and payments that arrive in chunks rather than in one go. That means your accounting has to track money by job, not just by month.
Three things set trades apart:
- Project-based work, where costs and income span several periods.
- Withheld payments, through CIS deductions and retentions.
- A bespoke VAT regime, in the form of the reverse charge for construction services.
Because of this, generic record keeping often falls short. You need to know not only whether the business is profitable overall, but whether each contract is.
The Construction Industry Scheme
The Construction Industry Scheme is HMRC’s mechanism for collecting tax from subcontractors at source. Under CIS, a contractor deducts a percentage from a subcontractor’s labour payments and pays it over to HMRC. That deduction counts as an advance payment towards the subcontractor’s Income Tax and National Insurance, or Corporation Tax for a company.
The deduction applies to the labour element only, not to materials, VAT or certain other costs. The rate that applies depends on the subcontractor’s status:
| Subcontractor status | Deduction applied |
|---|---|
| Verified and registered (standard) | Standard CIS rate |
| Registered for gross payment status | No deduction |
| Not verified or unregistered | Higher CIS rate |
Registering for gross payment status lets a subcontractor be paid in full and settle their own tax later, which is a major cash flow advantage for firms that can meet the turnover and compliance tests.
Contractor and subcontractor duties
Many trades businesses are both contractor and subcontractor on different jobs, so it pays to understand both sides.
As a contractor you must:
- Register with HMRC as a contractor before taking on subcontractors.
- Verify each subcontractor with HMRC to confirm the correct deduction rate.
- Deduct CIS where due and pay it to HMRC each month.
- Give every subcontractor a monthly payment and deduction statement.
- File a monthly CIS return, even where no payments were made (a nil return).
As a subcontractor you should:
- Register for CIS to avoid the higher deduction rate.
- Keep copies of every deduction statement, as these are your proof of tax already paid.
- Reclaim or offset CIS deductions through Self Assessment or your company’s payroll and Corporation Tax position.
CIS interacts with your wider payroll obligations, so it is worth reading our payroll and HR guides alongside this, especially if you also employ staff under PAYE.
The domestic VAT reverse charge
The domestic reverse charge changes how VAT is handled on most construction services between VAT-registered businesses. Instead of the supplier charging VAT and paying it to HMRC, the customer accounts for the VAT on their own return. In practice the subcontractor issues an invoice that states no VAT is charged and notes that the reverse charge applies, and the contractor records both the output and input VAT.
The reverse charge generally applies where:
- Both parties are VAT registered and registered for CIS.
- The supply is a standard or reduced-rated construction service.
- The customer is not an end user (for example, the final building owner).
This shift has a real cash flow effect: subcontractors no longer collect VAT they used to hold temporarily, while contractors no longer pay it across. If you are unsure how this fits your situation, our VAT schemes and returns hub explains the wider VAT landscape, and you can follow the steps in how to complete a VAT return once you are registered.
Job costing and accurate quotes
Job costing is the discipline that keeps a trades business profitable. The idea is simple: gather every cost tied to a specific contract, compare it against what you charged, and learn from the result.
A workable approach is to:
- Build the quote from itemised labour, materials, plant and overheads, then add your margin.
- Tag every purchase invoice, timesheet and subcontractor payment to the job.
- Compare actual cost against the quote as the work progresses, not just at the end.
This is where strong quoting practice pays off. Pinning down the scope, allowances and exclusions before you start avoids disputes later, and our guide to quotes, estimates and deposits covers how to present prices and protect yourself with deposits.
Tracking materials and labour
Material and labour costs are the largest variables on most jobs, so they deserve careful tracking.
- Materials: keep receipts and supplier invoices coded to the right job. Watch for waste, over-ordering and price rises between quote and purchase.
- Labour: record hours against jobs, whether for employees, your own time or subcontractors. Unbilled labour is lost profit.
Good digital records here also keep you compliant with Making Tax Digital, which requires VAT-registered businesses to keep records and file digitally. Sound bookkeeping habits underpin everything, so the bookkeeping guides are a useful companion.
Retentions and stage payments
Larger contracts rarely pay in a single lump. Two features are common:
- Stage payments (or interim valuations), where you invoice for work completed at agreed milestones.
- Retentions, where the customer holds back a percentage of each payment until the work is signed off, often released in two halves over a defined period.
For your accounts, a retention is income you have earned but not yet been paid. Track it as a receivable in contract retentions in the chart of accounts so it is not forgotten. Many firms lose meaningful sums simply because they never chased the retention release at the end of the defect period.
Cash flow tips for trades
Construction is capital-hungry: you often pay for materials and labour before the customer pays you. A few habits make a real difference:
- Take a deposit before starting and invoice stage payments promptly.
- Set aside money for CIS, VAT and tax as it arises rather than at the deadline.
- Keep a clear, well-presented invoice with firm payment terms and chase early.
- Maintain a simple cash flow forecast so you can see squeezes coming.
For deeper help, see our advice on dealing with late payers and setting aside money for tax.