Accounting for Construction & Trades: CIS, Cash Flow and Staying Compliant

Construction is one of the most heavily regulated sectors when it comes to bookkeeping, mostly because of the Construction Industry Scheme (CIS). Get CIS wrong and you can end up with cash flow problems, HMRC penalties, or subcontractors who aren't paid what they expected. Here's what matters most.

Understanding CIS deductions

Under CIS, contractors deduct money from a subcontractor's payments and pass it to HMRC as an advance payment towards the subcontractor's tax and National Insurance. The deduction rate depends on the subcontractor's status with HMRC: 20% for subcontractors registered under CIS, 30% for those who aren't registered, and 0% for subcontractors who've been granted gross payment status. Getting the verification step right before you pay a subcontractor matters: pay at the wrong rate and either HMRC or your subcontractor ends up out of pocket.

Gross payment status

Established subcontractors who meet HMRC's turnover and compliance tests can apply for gross payment status, meaning contractors pay them in full and they handle their own tax through Self Assessment or Corporation Tax instead of having it deducted at source. It's worth reviewing whether your business qualifies, since it can meaningfully improve cash flow, but it also means being disciplined about setting aside tax yourself rather than having it collected automatically.

Monthly CIS returns

Contractors must file a CIS return with HMRC every month, even in months where no subcontractors were paid, and the deadline is the 19th of the following month. Missed or late returns attract penalties that stack up quickly if they're not caught early, which is one of the more common ways construction businesses end up with unexpected HMRC bills.

The VAT domestic reverse charge

For most construction services supplied business-to-business within the CIS, VAT is handled under the domestic reverse charge: instead of the subcontractor charging VAT and the contractor paying it, the contractor accounts for the VAT directly to HMRC. It catches a lot of businesses out because invoices need to be worded correctly and it changes the cash flow subcontractors are used to: no VAT lands in their bank account to hold before their VAT return is due.

Project-based cost tracking

Trades and construction businesses live or die on knowing whether individual jobs are actually profitable, not just whether the business as a whole made money this year. Materials, labour, plant hire and subcontractor costs need to be tracked against each project, not lumped into a general expenses category, otherwise a loss-making job can hide inside an otherwise healthy year and go unnoticed until it happens again.

Cash flow around retentions and payment terms

Retentions, staged payments and 30-, 60- or 90-day payment terms are standard in construction, but they put real pressure on cash flow, especially for smaller subcontractors carrying material costs upfront. Forecasting that accounts for when money actually lands, not just when it's invoiced, makes a real difference to whether you can take on the next job comfortably.

Payroll and the National Living Wage

If you employ site staff directly, the National Living Wage (£12.71 an hour from April 2026) and rising employer National Insurance costs both affect your labour costs directly, on top of whatever you're paying subcontractors through CIS. Keeping payroll and CIS reporting in sync matters if your workforce is a mix of employees and subcontractors, which is the norm for most trades businesses.

How Books & Returns helps

We run monthly CIS returns, subcontractor verification and CIS refund claims alongside bookkeeping, payroll and VAT (including the domestic reverse charge), so nothing falls through the gap between "employed" and "subcontracted." Project-level cost tracking means you know which jobs are actually making you money, not just whether the year looks okay overall.

If CIS or cash flow is giving you a headache, book a free consultation and we'll walk through how we'd handle it.