Construction FAQ's
At Mayflower, we want to help you as much as we can. Below is a list of questions that we hope will help you along your journey.
How Do I Calculate and Account for Retentions?
Retention is a percentage of the contract value that is withheld by the customer until certain stages of the project have been completed. In construction, it is commonly used as security against defects or incomplete work.
A typical arrangement might be:
- 5% retention deducted from each application or invoice.
- 2.5% released at practical completion.
- 2.5% released at the end of the defects liability period.
For example, if you submit an application for £20,000 and a 5% retention applies:
- Contract value: £20,000
- Retention: £1,000
- Amount paid: £19,000
For accounting purposes, the retention is usually still recognised as income when the work is completed, even though the cash has not yet been received. The withheld amount should be recorded separately as a retention debtor so you can track what is owed and when it becomes due.
Many construction businesses overlook retentions when managing cash flow. Keeping a schedule of retention balances can help ensure amounts are collected promptly and prevent future cash shortfalls.
How Can I Work Out the Profit on a Project?
Understanding project profitability is essential for running a successful construction business. A project can appear busy and generate plenty of turnover whilst making very little profit.
A simple way to calculate project profit is:
Contract income
Less materials
Less subcontractor costs
Less direct labour costs
Less plant, equipment and site costs
Less other project-specific expenses
= Gross project profit
For example, if a project generates £100,000 of revenue and costs:
- Materials: £35,000
- Labour: £20,000
- Subcontractors: £15,000
- Plant hire and site costs: £5,000
The gross project profit would be £25,000.
It’s also important to remember that overheads such as office salaries, insurance, software, vehicles and accountancy fees still need to be covered by your projects. A job that appears profitable may contribute much less to the bottom line once these costs are considered.
Regularly reviewing project profitability helps you identify which contracts, customers and types of work generate the best returns, allowing you to improve pricing and make better commercial decisions.
How Do I Apply for Gross Payment Status?
Gross Payment Status (GPS) allows subcontractors to receive payments without CIS deductions being made at source. Instead of having 20% deducted from your payments, you’re responsible for paying any tax due through your normal tax affairs.
To qualify, you’ll need to apply to HMRC and meet certain conditions, including:
- Operating through a construction business.
- Keeping your tax affairs up to date.
- Meeting HMRC’s turnover requirements.
- Having a suitable compliance history with no significant late filings or unpaid tax.
Many established subcontractors apply for Gross Payment Status as it can significantly improve cash flow by allowing them to retain full payment for completed work.
Before applying, it’s worth checking that your tax returns, VAT returns, CIS returns and payment records are fully up to date. HMRC can refuse or withdraw Gross Payment Status if compliance standards are not maintained.
We can review whether you’re likely to qualify and help ensure your records are in good order before an application is submitted.
Should I Look at Invoice Finance?
Invoice finance can be a useful way to improve cash flow if you’re regularly waiting 30, 60 or 90 days to be paid for completed work.
Instead of waiting for your customer to pay, an invoice finance provider advances a large proportion of the invoice value, often within a few days of issuing it. The remaining balance is paid to you, less fees, once your customer settles the invoice.
Invoice finance may be worth considering if:
- You’re growing quickly and cash flow is under pressure.
- Customers take a long time to pay.
- You regularly fund labour and materials before being paid.
- You’re turning down work because of cash constraints.
However, it’s important to understand the costs involved and whether the benefit outweighs the fees. In some cases, improving credit control, requesting deposits or negotiating stage payments can be a more cost-effective solution.
Before committing to invoice finance, it’s worth reviewing your cash flow and debtor days to understand whether the underlying issue is slow payment, low margins or rapid growth.
How Can I Track My Gross Profit by Project Easily?
The easiest way to track project profitability is to record all income and costs against individual jobs as they happen. This allows you to see which projects are making money and which may need attention before they become a problem.
For each project, you should track:
- Sales invoices and applications.
- Materials purchased.
- Subcontractor costs.
- Direct labour costs.
- Plant hire and equipment costs.
- Other site-specific expenses.
Accounting software such as Xero or QuickBooks can help by using tracking categories, project codes or job costing reports to allocate income and costs to specific projects.
A simple gross profit calculation is:
Project income
Less direct project costs
= Gross profit
For example, if a project generates £80,000 of revenue and incurs £60,000 of direct costs, the gross profit is £20,000, representing a gross profit margin of 25%.
Reviewing these figures monthly helps you identify profitable work, spot cost overruns early and make better decisions about pricing future projects. The sooner you see an issue, the easier it is to take corrective action before it affects your overall profitability.
What Is the Domestic Reverse Charge?
The Domestic Reverse Charge (DRC) is a VAT rule that applies to many construction services supplied between VAT-registered businesses in the UK. Instead of the supplier charging VAT and paying it to HMRC, the customer accounts for the VAT on their own VAT return.
For example, if you’re a subcontractor carrying out qualifying construction work for a VAT-registered contractor, you may issue an invoice without adding VAT. The contractor then accounts for the VAT themselves under the reverse charge rules.
The Domestic Reverse Charge commonly applies where:
- Both businesses are VAT registered.
- The work falls within the Construction Industry Scheme (CIS).
- The customer is not the end user of the construction services.
Getting the VAT treatment wrong can lead to incorrect VAT returns and potential HMRC challenges. If you’re unsure whether the Domestic Reverse Charge applies, it’s important to check before raising your invoice, as the correct treatment depends on both the type of work and the status of your customer.
Our company has thousands in CIS deductions. How do we get them back?
A limited company offsets CIS deducted from its income against its own PAYE, National Insurance and any CIS it owes on its own subcontractors, month by month, through the Employer Payment Summary. Anything left at the end of the tax year can then be claimed back from HMRC, through an iForm.
Sole traders and partners get theirs through Self Assessment, as a payment towards their tax bill, so filing soon after 5 April brings any refund forward.
Either way, reconcile contractors’ CIS statements to HMRC’s records monthly, because one missing statement can hold up a repayment and HMRC could ask for support to approve your rebate.
What VAT rate applies to new builds, conversions and renovations?
New homes are zero-rated: building a new dwelling, including the subcontracted work on it, carries 0% VAT. Converting a commercial building into homes, or changing the number of homes in a building, is 5%, as is renovating a home that has been empty for at least two years.
Installing energy-saving materials such as insulation, solar panels and heat pumps in homes is zero-rated until 31 March 2027. Repairs, refurbishment and extensions to existing homes are 20%, as are architects’ and surveyors’ fees, even on new builds.
Get the evidence and certificates before you invoice. If HMRC disagrees later, the VAT usually comes out of your margin.
How can I reduce my corporation tax bill?
If you need plant and machinery, including vehicles such as vans, this can be an effective way to reduce your tax bill. You must make purchase before your year end. A sensible purchase of plant and machinery could generate a return, or allow you to complete more jobs and work on more sites in a day. However if you buy plant and machinery simply to save tax and it sits idle, it can be costly.
Pension contributions and are also an effective way of paying yourself and lowering your corporation tax at the same time. Make sure you seek financial advice concerning pensions in general.
In any circumstance, advanced planning, forecasts and year end check-ins with your accountant, which we offer standard, can help you understand what your tax will be and how you can prepare for it and influence it before it is too late.
I can’t pay my taxes on time, what can I do?
If you are struggling to pay your taxes on time, you have several options.
If there is a cash flow issue, it may be some planning or work to bring in cash quicker can resolve issues paying tax.
However if you find yourself short for tax, you may be able to arrange a Time To Pay arrangement with HMRC. A Time To Pay arrangement allows you to pay your tax over a longer period. HMRC will not charge penalties whilst you are within an arrangement, but they will continue to charge you interest.
If you need assistance arranging a Time To Pay, get in touch, and we can help prepare for a discussion with HMRC on your behalf.
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