25. September 2026

Construction Business Cashflow: Why CIS, VAT and Materials Matter

Article written by PR Accountants LTD in the category CIS

Construction businesses rarely fail because they have no work

Many construction businesses run into difficulty while their order book looks strong.

The business may have:

Several active sites
Rising turnover
Profitable quotations
Customers who eventually pay
A pipeline of new contracts

It can still run short of money.

Construction creates a demanding working-capital cycle. Materials, labour, plant, fuel, insurance and site costs may need to be paid before the work is certified. The customer may then pay 30, 45 or 60 days later. CIS can reduce the cash received from invoices. The VAT treatment can change the amount collected, the tax payment date and the timing of refunds. Retentions may remain unpaid long after practical completion.

Profit measures whether income exceeds costs over a period. Cashflow measures when money is actually available.

Both matter, but they answer different questions.

A profitable project can create a large temporary cash deficit. A cash-positive month can also conceal a loss-making project if the business has collected deposits, delayed suppliers or used VAT and CIS money that will soon be due to HM Revenue and Customs.

The solution is not simply to increase sales. The business needs to understand how each contract converts work into cash.

Why construction cashflow is unusually difficult

The construction cash cycle often contains several separate delays:

The contractor commits to materials and labour.
Suppliers request deposits or short payment terms.
Work is completed during the valuation period.
An application for payment is submitted.
The customer or quantity surveyor assesses the application.
A payment certificate is issued, sometimes for less than expected.
CIS and retention are deducted where relevant.
The customer pays on the contractual date, or later.
VAT and CIS are reported according to their own deadlines.
Input VAT or CIS credits may be recovered or offset later.

The business funds the gap between the early outflows and later usable inflows.

That gap can become larger when:

Material prices rise after the quotation
Variations are not approved promptly
Timesheets or applications are submitted late
Customers dispute the value of work
Retentions are withheld
VAT is accounted for before payment is received
CIS deductions are higher than expected
A customer uses the wrong CIS rate
Input VAT evidence is incomplete
The business grows across several projects at once

Growth can therefore consume cash even where gross margins remain positive.

The three cashflow systems that must be understood together

For many construction businesses, three systems overlap on the same invoice.

The commercial contract

The contract determines the agreed price, valuation process, payment terms, retention, variations, defects obligations and other commercial deductions.

The Construction Industry Scheme

CIS may require the contractor to deduct tax from the subcontractor's payment. The deduction is normally 20% for a registered subcontractor, 30% where the subcontractor is not registered or cannot be matched, and 0% where HMRC confirms gross payment status.

VAT

VAT determines whether the supplier charges VAT normally, uses the domestic reverse charge, applies a reduced or zero rate, or treats the supply in another way.

These systems interact, but they are not interchangeable.

A material amount might be part of the reverse-charge VAT value but excluded from the CIS deduction base. A retention might reduce the cash released without representing a cost. VAT collected under normal rules belongs to HMRC, even though it appears in the bank account. CIS suffered is a tax credit, even though it reduces the customer's payment.

Reliable cashflow management requires each element to be recorded separately.

CIS deductions: what they do to cash received

Under CIS, a contractor verifies a subcontractor and applies the deduction rate provided by HMRC.

The current rates are:

0% for a subcontractor with gross payment status
20% for a registered subcontractor where HMRC gives the standard rate
30% where the subcontractor is not registered or HMRC cannot match the details

The deduction is an advance payment towards the subcontractor's tax position. It is not a reduction in the subcontractor's turnover and it is not a fee charged by the contractor.

If a subcontractor invoices £20,000 and suffers a valid CIS deduction of £3,000, its accounts should normally record:

£20,000 of sales, subject to the appropriate VAT treatment
£17,000 received or due in cash
£3,000 as CIS tax suffered or a tax receivable

Recording only the £17,000 bank receipt understates sales and can overstate the customer balance, distort profit margins and make the CIS credit difficult to recover.

HMRC's guidance for CIS subcontractors confirms that the deductions are advance payments and explains how they are claimed.

How CIS deductions are calculated

The contractor starts with the gross invoice amount and removes amounts that are excluded from the CIS deduction calculation.

Subject to the detailed rules, exclusions can include:

VAT
Materials paid for directly by the subcontractor
Certain consumable stores
Fuel used for the work, excluding travel fuel
Plant hired for the job
Manufacturing or prefabricating materials

The HMRC-authorised percentage is then applied to the remaining amount.

Materials are a frequent area of error. The contractor can ask for evidence that the subcontractor paid for the materials directly. An amount described as materials on an invoice is not automatically deductible from the CIS calculation.

The materials exclusion should reflect qualifying direct cost, not an unsupported estimate designed to reduce CIS. Labour, overhead recovery and profit cannot be relabelled as materials.

HMRC sets out the calculation in its CIS deduction guidance.

Worked example: profit does not equal available cash

Assume a VAT-registered subcontractor completes a standard-rated construction package for a VAT-registered contractor. The domestic reverse charge applies.

The invoice contains:

Labour and service value: £40,000
Direct materials: £10,000
Total net sale: £50,000
Reverse-charge VAT at 20%: £10,000 for the customer to account for

The subcontractor does not add the £10,000 VAT to the amount payable.

The contractor has verified the subcontractor at 20%. If the £10,000 material cost is supported and qualifies for CIS purposes, the CIS deduction is calculated on £40,000.

CIS deduction: £8,000
Cash paid to the subcontractor: £42,000

Before receiving the customer's payment, the subcontractor has already paid:

Materials: £12,000 including £2,000 VAT
Direct labour: £20,000
Other project overheads: £5,000

Its immediate project cash outflow is £37,000. The customer payment leaves only £5,000 in the bank.

However, on a simplified net-of-VAT profit basis, the project has produced:

Revenue: £50,000
Materials excluding recoverable VAT: £10,000
Direct labour: £20,000
Other project overheads: £5,000
Accounting profit before other business costs and tax: £15,000

Why is only £5,000 visible in cash?

£8,000 has been withheld as CIS tax suffered
£2,000 of input VAT was paid with the materials and is awaiting recovery through the VAT process

The £10,000 difference has not disappeared, but it is not immediately available to pay the next project's costs.

This is the type of timing gap a project cashflow forecast should reveal before work begins.

CIS suffered is not always recovered quickly

The recovery route depends on the subcontractor's legal structure.

Sole traders and partners

A sole trader or partner normally reports the gross income and CIS deductions on the annual Self Assessment tax return. HMRC offsets the deductions against the final tax and National Insurance position and repays any excess.

This can leave cash tied up for a substantial period, particularly where deductions are suffered early in the tax year.

The subcontractor should therefore maintain a monthly CIS schedule and not wait until the tax return is prepared to discover missing statements.

Limited companies

A limited company normally reports CIS deductions suffered through its payroll using an Employer Payment Summary. HMRC offsets the credit against PAYE, National Insurance and CIS liabilities due from the company.

Unused deductions can be carried forward within the same tax year. Any excess remaining after the tax year may be reclaimed through the relevant HMRC process.

The company should not claim CIS deductions through its Corporation Tax return.

The cashflow benefit depends on the company's payroll and contractor liabilities. A company with a large PAYE bill may use the credit relatively quickly. A labour-light company with little PAYE may carry a substantial balance until a repayment can be obtained.

Missing CIS statements create a cashflow and evidence problem

A subcontractor needs payment and deduction statements to support its CIS claim.

Contractors that make deductions must provide a statement within 14 days of the end of the relevant CIS tax month. The statement should allow the subcontractor to identify the payment, qualifying materials and deduction.

Missing statements can lead to:

Delayed tax credits
HMRC queries
Differences between the subcontractor's claim and contractor returns
Uncertain customer balances
Duplicate or omitted deductions
Time-consuming year-end reconstruction

The subcontractor should reconcile each receipt when it arrives. If £8,000 has been withheld, it should immediately know which certificate and statement support that credit.

A CIS receivable balance that increases every month without reconciliation is not a sign of healthy liquidity.

Contractors must not treat CIS withheld as spare cash

The contractor has the opposite cashflow position.

When it deducts CIS from a subcontractor, it pays less to the subcontractor but owes the deduction to HMRC. The amount withheld is a liability, not income and not a saving on the project.

HMRC requires monthly CIS returns by the 19th following the end of the tax month. Electronic payment is generally due by the 22nd, or the 19th if paying by post.

For example, a contractor deducts £12,000 across several subcontractor payments. Its bank balance may temporarily be £12,000 higher, but the business has also created a £12,000 liability to HMRC.

If that money is used to buy materials or cover another site, the business may be unable to meet the HMRC deadline.

A suitable process is to:

Record CIS withheld as a liability when each payment is posted
Reconcile the liability to the monthly CIS return
Include the payment date in the cashflow forecast
Reserve the money in the bank where practical
Review the combined PAYE and CIS payment before the deadline

HMRC confirms the return and payment dates in its monthly return guidance and CIS payment guidance.

The domestic reverse charge changes the cash collected

The VAT domestic reverse charge applies to many standard-rated and reduced-rated construction services within CIS where the required conditions are met.

Instead of charging and collecting VAT, the supplier issues a reverse-charge invoice. The customer accounts for the VAT on its own VAT Return and may recover the same amount as input tax, subject to the normal rules.

For a subcontractor, the immediate effect is simple but significant: the customer does not pay the VAT element.

A £50,000 standard-rated supply would produce a £60,000 invoice under normal VAT accounting. Under the reverse charge, only £50,000 is payable before CIS and other contractual deductions.

That £10,000 was never income or profit under normal accounting. However, many businesses previously benefited from the temporary cash balance between collecting VAT and paying their VAT Return. The reverse charge removes that timing benefit.

HMRC specifically warns that subcontractors may see lower gross cash receipts and may become VAT repayment traders. Its domestic reverse-charge technical guide explains the cashflow impact and permits businesses to apply for monthly VAT Returns where appropriate.

Reverse-charge VAT is not a cash cost in every case

For a fully taxable customer, reverse-charge VAT is often broadly neutral on the same VAT Return.

The customer records the VAT as output tax and claims it as input tax, provided the normal recovery conditions are satisfied.

However, that does not mean the transaction can be ignored.

The entries are still required, and the result may not be neutral where the customer:

Makes exempt supplies
Has non-business activity
Is partly exempt
Uses the cost for private purposes
Has restricted input-tax recovery
Does not hold adequate evidence

A residential property business, for example, may be unable to recover all of the reverse-charge VAT relating to exempt residential rent. It can therefore face a real VAT cost despite not paying the VAT to the supplier.

Cashflow forecasts should reflect the actual recoverable amount, not assume every reverse-charge entry cancels.

Normal VAT can also create a cashflow trap

Not every construction sale is subject to the reverse charge.

Normal VAT may apply to:

Supplies to private householders
Supplies to end users that have provided written notification
Work outside CIS
Supplies of staff by an employment business
Certain goods-only or professional-service supplies
Other transactions outside the reverse-charge conditions

Where normal invoice accounting applies, a VAT tax point can arise before the customer pays. The business may therefore owe VAT to HMRC while the sales invoice remains outstanding.

For example, a contractor raises a £120,000 invoice including £20,000 VAT shortly before the end of its VAT quarter. The customer pays 60 days later, but the VAT Return and payment may become due first.

The contractor has to fund £20,000 unless another scheme, tax-point rule or input VAT position changes the outcome.

The VAT Cash Accounting Scheme can help eligible businesses account for normal sales VAT when customers pay, but it cannot be used for transactions subject to the construction domestic reverse charge. HMRC's VAT Cash Accounting Scheme guidance explains the general eligibility and operation.

VAT collected is not working capital

When normal VAT is charged and paid by the customer, the VAT element increases the bank balance. It does not increase profit.

Using that money to fund payroll, drawings or another project creates a future problem when the VAT Return falls due.

The normal VAT Return and payment deadline is usually one calendar month and seven days after the end of the accounting period. A business should check its exact deadline in its VAT account.

Good practice is to calculate a VAT provision throughout the quarter rather than wait for the return.

The provision should consider:

Output VAT on normal sales
Reverse-charge output VAT on purchases
Recoverable input VAT
Credit notes
Import VAT and postponed accounting
Bad-debt adjustments where applicable
Partial-exemption restrictions
Prior-period corrections

The bank balance should not be interpreted without deducting the tax liabilities already embedded within it.

Monthly VAT Returns can improve repayment timing

A subcontractor making mostly reverse-charge sales may pay VAT on materials and overheads without collecting VAT from customers.

This can produce regular VAT repayments.

Quarterly returns may leave input VAT tied up for several months. HMRC allows a business affected by the reverse charge to apply to move to monthly VAT Returns.

Monthly filing can:

Accelerate valid repayments
Reduce the period for which material VAT is funded
Improve alignment between project costs and recoveries
Make errors visible sooner

It also requires:

Bookkeeping every month
Prompt receipt capture
Monthly VAT reconciliations
More frequent review and submission
Careful monitoring of HMRC queries

Moving to monthly returns is useful only if records are kept current. Filing an incomplete return quickly does not improve control.

Materials can consume cash before a project starts

Material-heavy work often requires the largest early cash commitment.

The contractor may need to pay for:

Supplier deposits
Bespoke fabrication
Bulk orders
Delivery and haulage
Storage
Insurance
Security
Waste removal
Replacement of damaged or stolen items
Price changes on later phases

If the supplier requires payment in 14 days but the customer pays 45 days after certification, the construction business funds the difference.

The accounting margin may be correct, but the cash timing is not self-funding.

A project quote should therefore show both:

Expected profit over the complete contract
Maximum cash required before cumulative customer receipts catch up

The second figure is the project's peak funding requirement.

Net cost and gross cash cost are different

A VAT-registered business often evaluates materials at their net cost when calculating profit because recoverable VAT is not an expense.

The supplier still receives the gross cash amount.

If materials cost £30,000 plus £6,000 VAT:

The profit calculation may use £30,000
The bank payment is £36,000
The £6,000 is recovered only through the VAT process, subject to evidence and entitlement

The project cashflow must therefore use £36,000 on the supplier payment date and show the expected VAT recovery separately.

Using £30,000 in both the project margin and cashflow forecast understates the immediate funding need by £6,000.

Materials and CIS are often confused

Qualifying direct materials paid for by the subcontractor can be excluded before the CIS deduction percentage is applied.

That does not mean:

Every item labelled materials qualifies
The full selling price of materials can be excluded
A markup is treated as material cost
Materials purchased by another party can be claimed by the subcontractor
The material value is removed from turnover
The material value is outside reverse-charge VAT

The VAT and CIS calculations use different logic.

For a single supply of construction services with goods, the domestic reverse charge generally applies to the full invoice value when the relevant conditions are met. CIS may still apply only to the amount remaining after supported qualifying material costs are removed.

The invoice and supporting records should make this distinction clear.

Material markups must cover more than purchase price

A contractor that buys materials for £10,000 and recharges £10,000 has not necessarily broken even.

The project may also carry:

Delivery charges
Storage costs
Handling time
Wastage
Breakage
Theft risk
Supplier finance costs
Returns and restocking charges
Warranty responsibility
Time spent ordering and checking goods
Price risk between quotation and purchase

A material markup should reflect the commercial responsibility being accepted. It should not be disguised as material cost for CIS purposes.

The business should distinguish:

Direct material cost
Material-related project costs
Overhead recovery
Profit margin

This improves both pricing and CIS compliance.

Price increases can turn a profitable quotation into a weak contract

A quotation may remain open for weeks or months. Material prices can change before the order is placed.

Cashflow and profit controls should therefore consider:

How long the quotation is valid
Whether prices are fixed or provisional
Whether the contract permits price adjustments
Whether key suppliers will hold prices
Whether deposits can secure stock
Whether the customer will fund off-site materials
The cost of holding stock early
The risk of cancellation or redesign

Buying early may protect the margin but increase the funding requirement. Buying late may preserve cash but expose the business to price rises or programme delays.

The right decision depends on the contract, supplier terms and available liquidity.

Retentions delay cash after the work is complete

Construction contracts often allow the customer to withhold part of each certified payment as retention.

A common structure releases one portion at practical completion and the remainder after the defects period. The exact terms vary.

Retention is not normally an expense. It remains an amount potentially receivable, subject to the contract and satisfactory completion. However, it may be unavailable for months or years.

The business may already have paid:

Materials
Labour
Subcontractors
Plant
Insurance
Overheads
Tax

The project can therefore show a profit while the retention remains locked in debtors.

Each retention should be recorded by:

Customer
Project
Original certificate
Amount withheld
Expected first release date
Expected final release date
Conditions for release
Invoice and VAT status
Person responsible for collection

Old retentions should not sit in trade debtors without active review.

Applications, certificates and invoicing delays matter

A 30-day payment term does not mean cash arrives 30 days after the work is done.

If the business waits ten days to prepare an application, the customer takes another ten days to certify it, and the invoice is then due in 30 days, the operational delay is closer to 50 days.

Weak administration can add unnecessary funding pressure.

Controls should include:

A calendar of application dates
Site records supporting completed work
Signed variation approvals
Prompt quantity-surveyor review
Responsibility for issuing invoices
Follow-up on missing certificates
Immediate challenge of unexplained reductions
A clear debt-collection timetable

Improving the application process can release cash without changing prices or taking finance.

Variations can create unfunded work

Construction businesses often perform additional work to protect a programme or customer relationship before the variation price is formally agreed.

The cost is real and immediate. Recovery may be uncertain.

Uncontrolled variations can lead to:

Materials purchased without an approved budget
Labour used without a signed instruction
Disputes over scope
Delayed certification
Reduced final accounts
Margin erosion
Cash tied up in unbilled work

A variation register should show:

Date instructed
Person authorising the work
Description
Estimated cost
Proposed selling price
Approval status
Work completed
Amount applied for
Amount certified
Amount paid

The business should set an authority limit for starting unapproved work. Emergency operational decisions may still be necessary, but the financial exposure should be visible.

Work in progress is not cash

Work in progress can increase reported profit or assets before the customer is billed and paid.

That accounting treatment may be correct, but it does not provide liquidity.

A growing work-in-progress balance can indicate:

More work is being completed between valuations
Applications are delayed
Variations have not been agreed
Projects are being measured optimistically
Costs are being incurred faster than billing
Revenue recognition is ahead of cash collection

Management should review work in progress project by project. The question is not only whether the value is supportable, but also when it will become an invoice and when that invoice will become cash.

Customer deductions need to be separated

A remittance may be lower than the invoice for several reasons:

CIS
Retention
Contra charges
Defect deductions
Main-contractor discount
Previous overpayment recovery
Liquidated damages
Disputed variations
Incorrect VAT treatment

Posting the net receipt against sales without analysing these deductions loses essential information.

Each deduction has a different accounting and cashflow consequence:

CIS creates a tax credit for the subcontractor
Retention may remain a receivable
A valid contra charge may be a cost or reduction
A disputed amount may remain due
An agreed discount may reduce revenue
Incorrect VAT requires correction

A remittance reconciliation should be completed before the customer account is cleared.

Turnover growth can make the cash gap worse

Assume one project requires £60,000 of funding at its lowest cash point. The business can support that project from existing cash and a modest facility.

It then wins three similar projects starting in the same month.

The combined peak requirement may approach £180,000 before considering central overheads, tax and delays. The profit opportunity has tripled, but so has the working-capital demand.

This is why rapid growth can create insolvency risk.

Before accepting additional work, management should ask:

What is the peak cash requirement for each project?
When do the low points overlap?
Which projects depend on the same labour or suppliers?
How much contingency is available?
What happens if the largest customer pays 30 days late?
Are VAT and CIS credits recoverable in time?
Will the facility remain within its limit?

Turnover is not a substitute for funding capacity.

A project cashflow should be built before the contract starts

A useful project cashflow begins with the programme, not the annual accounts.

For each week or month, it should estimate:

Cash outflows

Material deposits and balances
Labour and payroll
Employer National Insurance and pension costs
Subcontractor payments
CIS due to HMRC
Plant and equipment hire
Fuel and travel
Site establishment
Insurance and bonds
Professional fees
Waste and security
Allocated overheads
VAT paid to suppliers
Finance costs

Cash inflows

Deposits
Interim payments
Stage payments
Certified applications
Normal VAT collected
Expected input VAT refunds
CIS offsets or repayments
Retention releases
Final account receipts

The forecast should use payment dates, not only invoice dates.

It should also show the lowest cumulative cash point. That figure indicates the funding the project is likely to require if assumptions are met.

Worked example: calculating the peak funding gap

A contractor accepts a £180,000 net contract expected to earn a £27,000 profit.

Before the first customer payment, it expects to fund:

Material deposits and deliveries: £54,000 including VAT
Payroll and labour: £32,000
Plant and site costs: £9,000
Insurance and allocated overhead: £7,000

The initial cash requirement is £102,000.

The first certified payment is £75,000 net. The domestic reverse charge applies to the contractor's supply, so no VAT is collected. A 20% CIS deduction of £10,000 is made after qualifying material amounts are considered. Retention of £3,750 is also withheld.

The immediate customer receipt is £61,250.

The project remains £40,750 cash-negative before later expenditure and receipts.

The anticipated £27,000 profit does not remove the need to finance that low point.

If the contractor had forecast only the final profit, it might accept the work without sufficient working capital.

Build a rolling 13-week cashflow forecast

An annual cashflow budget is useful for strategy, but construction businesses also need a short-term forecast that is updated frequently.

A rolling 13-week forecast gives enough visibility to see:

Three monthly payroll cycles
Quarterly VAT in many cases
Several CIS deadlines
Material commitments
Customer receipts
Facility usage
Emerging shortages

Each week, the business should:

Replace the previous week's estimates with actual bank movements.
Update customer receipt dates using live credit-control information.
Add newly approved purchase orders and payroll changes.
Review VAT, PAYE and CIS amounts.
Update retentions and disputed applications.
Test the lowest projected bank balance.
Decide who is responsible for each corrective action.

A forecast that is not updated becomes a historical document rather than a management tool.

Use three cashflow scenarios

One forecast can create false confidence.

A construction business should normally consider at least three scenarios.

Expected scenario

This uses the best current estimate of certification, collections, costs and tax.

Downside scenario

This might assume:

The largest customer pays 30 days late
A valuation is reduced
Materials cost 5% more
A retention is delayed
VAT repayment takes longer
A variation remains unapproved

Severe but plausible scenario

This could combine a major debtor delay with an unexpected cost or project dispute.

The purpose is not to predict the exact future. It is to understand how much resilience the business has and which event would trigger action.

Measure the right construction cashflow indicators

The bank balance alone is not enough.

Useful indicators include:

Cash runway

Estimate how many weeks of unavoidable payroll, supplier and tax payments available cash can cover.

Debtor days

Monitor how long customers take to pay compared with contract terms. Review by customer because an average can hide one large overdue balance.

Unbilled work

Measure completed work that has not reached an application or invoice. Rising unbilled work is an early warning.

Certification shortfall

Compare amounts applied for with amounts certified. Repeated reductions may indicate weak evidence, disputed scope or overly optimistic applications.

Retention ageing

Track retentions by expected release date and follow up overdue amounts.

Committed material spend

Include approved purchase orders, not only supplier invoices already posted.

CIS suffered balance

Reconcile tax credits to contractor statements and HMRC submissions. Monitor how quickly limited-company credits are used or refunded.

CIS liability

Compare deductions withheld with amounts reported and due to HMRC.

VAT recovery lag

Measure input VAT paid but not yet recovered, particularly where reverse-charge sales make the business a repayment trader.

Project cash variance

Compare actual inflows and outflows with the project forecast. Investigate timing and permanent cost differences separately.

Pricing should include the cost of cash

Two projects with the same accounting margin may not be equally valuable.

One may require £100,000 of funding for four months. Another may be funded by a deposit and staged payments. Even if both produce a £20,000 accounting profit, the second contract may offer a stronger commercial return and lower risk.

Pricing should consider:

Funding required
Duration of the funding gap
Interest and facility fees
Retention period
Customer credit risk
Material-price exposure
Administration required for valuations and variations
Probability of disputes
Opportunity cost of using working capital

A low-margin contract with slow payment can consume capacity that would have supported better work.

Negotiate the cash profile, not only the contract price

A business can improve project cashflow through commercial terms such as:

Deposits for bespoke or high-value materials
Payment for off-site materials where properly protected
Shorter valuation periods
Clear application and certification dates
Milestone payments
Lower retention percentages
Earlier partial retention release
Direct payment for agreed material packages
Price-adjustment clauses for volatile materials
Advance-payment arrangements supported by appropriate security
Clear variation approval processes

The customer may not accept every request. However, accepting the headline price without examining the payment profile leaves a major part of the contract unpriced.

Supplier terms can reduce the funding gap

Supplier credit should be negotiated before the order is placed.

Useful steps can include:

Requesting 30-day rather than immediate payment
Aligning supplier dates with customer valuation dates
Splitting large deliveries into phases
Agreeing deposits and balances rather than full advance payment
Consolidating purchasing to strengthen bargaining power
Avoiding excess stock
Returning unused materials promptly
Reviewing credit limits before mobilisation

Longer terms should not be achieved by paying late without agreement. That damages relationships, can stop deliveries and may affect credit insurance or future pricing.

Credit control should start before the invoice is overdue

Construction credit control begins with contract setup.

Before work starts, the business should confirm:

The correct legal customer
Billing address and accounts contact
Purchase-order requirements
Application dates
Certification process
Payment terms
VAT and CIS status
End-user position where relevant
Retention terms
Dispute and notice procedures

After the application is submitted, the responsible person should confirm it has been received and is complete. Once certified, the invoice should be issued promptly. Before the due date, the accounts team should confirm that the invoice is approved for payment.

Waiting until an invoice is overdue gives the customer time to raise administrative issues that could have been resolved earlier.

Do not solve permanent losses with temporary finance

Working-capital finance can help bridge a timing gap. It cannot repair a contract that loses money.

Before arranging finance, management should separate:

Timing deficits from profitable work
Permanent margin losses
Historic tax arrears
Director drawings
Capital expenditure
One-off disputes

Borrowing may be appropriate where a well-supported receipt is expected after the funding period. It is dangerous where the business cannot explain why cash repeatedly fails to recover.

The forecast should show how and when the facility will be repaid, not simply that it is available.

Financing options and their limitations

Depending on the business and contracts, options may include:

Overdrafts
Revolving credit facilities
Invoice finance
Asset finance for vehicles and plant
Supplier credit
Customer deposits
Director or shareholder funding
Project-specific finance

Each has costs and conditions.

Invoice finance may exclude retentions, uncertified applications or disputed debts. A lender may apply concentration limits where one main contractor represents most sales. Personal guarantees may be required. Asset finance funds equipment, not payroll or tax. Director funding increases personal exposure.

Finance should follow a reliable forecast and a clear commercial need.

Gross payment status can improve cashflow, but it is not automatic

A CIS subcontractor can apply to HMRC for gross payment status if it meets the required conditions.

Gross payment status means contractors pay without making CIS deductions. This can materially improve cash available during the year.

It does not:

Remove the final tax liability
Change the VAT reverse-charge treatment
Convert unprofitable work into profitable work
Eliminate the need for tax reserves
Protect the business from late customer payment

The business must continue meeting HMRC's conditions to retain the status. Before applying, it should ensure filings, payments, business operations and records are in order.

Even with gross payment status, money required for Corporation Tax, Income Tax, PAYE and VAT should be reserved.

Accounting software must record the gross transaction

Bank-feed bookkeeping can be misleading when receipts are net of CIS, retention or other deductions.

For a subcontractor sale, the accounting records may need to show:

Gross sales value
Normal VAT or reverse-charge VAT treatment
CIS tax suffered
Retention receivable
Other agreed deductions
Cash received
Remaining trade debtor

For a contractor purchase, the records may need to show:

Gross project cost
Reverse-charge VAT entries
CIS withheld
Retention payable
Supplier payment
CIS liability to HMRC

Posting only the bank amount prevents accurate project reporting.

The business should test its VAT and CIS codes, reconcile control accounts and retain the supporting certificate or remittance.

Job costing should be updated during the project

Cashflow management is stronger when linked to live job costing.

Each project should compare:

Contract value
Approved variations
Amount applied for
Amount certified
Amount invoiced
Amount received
Retention
Actual materials
Committed purchase orders
Labour cost
Subcontract cost
Plant and other direct costs
Forecast cost to complete
Expected final margin
Current and forecast cash position

A project can remain on budget overall but still produce a cash crisis because costs are earlier than expected. It can also appear cash-positive because suppliers have not been paid, while the expected final margin is deteriorating.

Both views are required.

Common construction cashflow mistakes

Mistake 1: Using the bank balance as available cash

The bank may contain VAT, CIS withheld, PAYE, retention obligations and supplier money that is already committed.

Available cash should be assessed after near-term liabilities and restricted amounts are considered.

Mistake 2: Recording net CIS receipts as turnover

This understates sales and loses the tax credit. Gross income, cash and CIS suffered should be recorded separately.

Mistake 3: Treating CIS withheld as a saving

The contractor owes the deduction to HMRC. It should be recorded and reserved as a liability.

Mistake 4: Ignoring the 30% CIS rate risk

If a subcontractor is not registered or cannot be matched, HMRC may require a 30% deduction. The difference can destabilise the subcontractor's cashflow.

Onboarding and verification should happen before the first payment.

Mistake 5: Claiming unsupported materials for CIS

Unsupported material amounts can create an incorrect deduction, later liabilities and disputes between contractor and subcontractor.

Mistake 6: Treating material VAT as immediately recovered

The VAT may be recoverable in the accounts, but the supplier has already received the gross payment. The refund or offset occurs later.

Mistake 7: Expecting reverse-charge VAT from the customer

A subcontractor subject to the reverse charge does not collect that VAT. Quotes and cash forecasts should not include it as an inflow.

Mistake 8: Spending normal VAT collected

VAT collected from customers increases cash temporarily but is normally payable to HMRC after input VAT and other adjustments.

Mistake 9: Forecasting invoices instead of receipts

An invoice date does not tell the business when the customer will pay. Use realistic payment dates based on the contract and customer history.

Mistake 10: Ignoring retentions

Retention reduces cash now and may remain outstanding for a long period. It should have its own collection schedule.

Mistake 11: Starting variations without financial control

Unapproved work consumes cash and may never be certified at the expected value.

Mistake 12: Omitting committed purchase orders

The cashflow may look healthy because materials ordered but not yet invoiced are missing.

Mistake 13: Using profit to estimate cash

Profit excludes many timing movements. A £50,000 profit does not show the peak funding requirement.

Mistake 14: Growing several projects at once without funding

Overlapping material and payroll demands can exceed the cash capacity of an otherwise profitable business.

Mistake 15: Waiting until the tax deadline to calculate liabilities

VAT, PAYE and CIS should be estimated throughout the reporting period.

Mistake 16: Relying on annual accounts

Annual accounts may identify last year's profit but are too late to manage next month's wages and suppliers.

Mistake 17: Confusing a VAT refund with profit

A refund often returns VAT already paid to suppliers. It is a cash-timing movement, not new trading income.

Mistake 18: Financing losses without changing the underlying contract

More borrowing delays the problem if prices, productivity or variation recovery are inadequate.

Weekly construction cashflow checklist

Each week, the finance or management team should:

Reconcile all bank accounts
Update the 13-week cashflow forecast
Review customer receipts expected in the next four weeks
Check applications awaiting certification
Issue approved invoices promptly
Chase overdue debts before supplier and payroll dates
Update the variation register
Review committed material orders
Check supplier balances and credit limits
Update labour and payroll forecasts
Review CIS deductions suffered and statements missing
Review CIS withheld and the amount due to HMRC
Update the VAT provision or expected repayment
Track retentions due for release
Compare project cashflows with actual movements
Investigate projects exceeding their expected funding requirement
Confirm facility headroom
Assign actions and deadlines

The review should be based on current evidence, not optimistic payment assumptions.

Month-end financial controls

At each month-end, the business should also:

Reconcile sales and purchase ledgers
Post gross transactions rather than only bank receipts
Reconcile CIS suffered to payment statements
Reconcile CIS withheld to the contractor return and HMRC liability
Review VAT codes and reverse-charge entries
Reconcile VAT control accounts
Review work in progress and accrued income
Review retentions and overdue debtors
Update job costs and forecast costs to complete
Compare actual gross margin with tendered margin
Review material price and usage variances
Accrue uninvoiced supplier costs
Review director drawings and loans
Update the tax forecast
Produce management accounts
Document corrective actions

Monthly management accounts should explain why cash changed, not simply show the closing balance.

Warning signs that cashflow controls are failing

The business should investigate where:

Profits are rising but the overdraft is increasing
Suppliers are paid later each month
Payroll depends on one customer receipt
VAT or CIS money is routinely used for other costs
Applications are prepared after contractual deadlines
Retentions are not tracked individually
CIS statements are missing
VAT repayments are unexpectedly delayed
Material costs exceed estimates without approved variations
Work in progress rises faster than invoicing
Customer accounts contain unexplained credits or deductions
Manual journals are used to force VAT or CIS balances to agree
Directors regularly inject emergency funds
New projects start before earlier projects generate cash
The accountant receives project information only at year-end

One item may have a reasonable explanation. Several together suggest that the business is funding problems it has not measured.

What to do if a cash shortage is approaching

Act before payments are missed.

Confirm the amount and date

Use the rolling forecast to identify the lowest cash point, which obligations create it and how long it lasts.

Verify expected receipts

Contact customers. Confirm whether applications are certified, invoices are approved and payments are scheduled.

Accelerate valid billing

Submit outstanding applications, variations and invoices. Request release of due retentions.

Review supplier arrangements

Discuss realistic terms before the due date. Do not make promises the business cannot keep.

Protect payroll and statutory obligations

Prioritise payroll, tax and essential operational costs using professional advice where required.

Stop avoidable cash leakage

Delay non-essential capital purchases, drawings and discretionary spending. Review loss-making or unfunded work.

Consider appropriate finance

Provide the lender or broker with current management accounts, a debtor list, project cashflows and a credible repayment route.

Contact HMRC early if tax cannot be paid

HMRC may agree a payment plan where it considers the arrangement affordable. Interest can continue and agreement is not guaranteed. The business should not wait for enforcement action before making contact. See HMRC's guidance for businesses unable to pay tax on time.

Review solvency

If the company cannot pay debts as they fall due, directors should take prompt professional insolvency advice. Continuing to trade without understanding the position can increase losses and director risk.

Frequently asked questions

Why does my construction business show a profit but have no cash?

Cash may be tied up in debtors, retentions, work in progress, CIS suffered and input VAT. The business may also have paid for materials and labour before receiving customer funds.

Profit records income and cost. It does not show when cash moves.

Is CIS deducted from turnover?

No.

CIS suffered is an advance tax payment. The subcontractor should normally record gross sales and a separate CIS tax credit.

Is CIS withheld by a contractor part of its profit?

No.

The contractor owes the deduction to HMRC. It is a liability until paid or validly offset within the PAYE and CIS system.

How much CIS should be deducted?

HMRC tells the contractor which rate to use after verification. The common rates are 0%, 20% and 30%.

The rate is applied to the appropriate amount after valid exclusions, including qualifying direct materials, are considered.

Can a contractor exclude all invoiced materials from CIS?

No.

The exclusion is based on qualifying amounts the subcontractor paid directly. The contractor can request evidence. Markup, labour and unsupported figures should not be treated as material cost.

When must the contractor pay CIS deductions to HMRC?

Payment is generally due by the 22nd after the CIS tax month if paid electronically, or the 19th if paid by post. The monthly return is due by the 19th.

The business should check its HMRC account and payment method.

How does a limited company recover CIS deductions suffered?

It normally reports year-to-date CIS deductions through an Employer Payment Summary and uses the credit against PAYE, National Insurance and CIS liabilities. Excess credit remaining after the tax year may be reclaimed.

It should not claim the deduction through the Corporation Tax return.

How does a sole trader recover CIS deductions?

The sole trader records gross income and CIS deductions on the Self Assessment tax return. HMRC offsets the deductions against the tax and National Insurance due and repays any excess.

Does gross payment status solve cashflow problems?

It can improve cash receipts by removing CIS deductions, but it does not improve margins, accelerate customer payment or remove final tax liabilities.

The business still needs a tax reserve and project cashflow controls.

Why do I no longer receive VAT from the main contractor?

The domestic reverse charge may apply. Where it does, the customer accounts for VAT on its own VAT Return and does not pay that VAT to the supplier.

The invoice must use the correct reverse-charge wording and treatment.

Can reverse-charge VAT be treated as zero rated?

No.

The underlying supply is normally standard or reduced rated. The reverse charge changes who accounts for the VAT, not the VAT rate.

Can I use the VAT Cash Accounting Scheme for reverse-charge sales?

No.

Construction reverse-charge supplies are excluded from the scheme. An eligible business may continue using cash accounting for other qualifying transactions.

Should a repayment trader use monthly VAT Returns?

It may improve cashflow by accelerating valid input VAT repayments. The administrative cost and ability to maintain monthly records should also be considered.

Is input VAT on materials the same as cash in the bank?

No.

The business pays the gross supplier invoice. Recoverable input VAT is claimed later through the VAT Return and may be subject to checks or restrictions.

Do materials remain subject to reverse-charge VAT?

Where materials form part of a single qualifying construction supply, the reverse charge generally applies to the full value. CIS may use a separate calculation that excludes qualifying direct material cost.

Is retention a business expense?

Usually not merely because it has been withheld. It may remain a receivable until released, subject to the contract and any dispute.

It still creates a cashflow delay and should be monitored individually.

How often should a construction cashflow forecast be updated?

A rolling 13-week forecast should normally be updated weekly. Large or high-risk projects may require more frequent monitoring.

Should a forecast include purchase orders that have not been invoiced?

Yes.

Committed spending affects future cash even if the supplier invoice has not arrived. Omitting purchase orders understates the funding requirement.

Can invoice finance fund construction debts?

Sometimes, but eligibility varies. Funders may exclude uncertified applications, disputed debts, retentions or customers exceeding concentration limits.

The terms and true cost should be reviewed carefully.

What should directors do if the company cannot pay HMRC?

Update the cashflow forecast, confirm the amount due and contact HMRC promptly to discuss available options. A payment plan is not automatic and interest may apply.

If the company cannot pay debts generally, directors should obtain insolvency advice without delay.

Construction cashflow should guide decisions before problems arise

Good cashflow management is not simply chasing overdue invoices.

It begins when the business:

Prices the contract
Agrees payment terms
Orders materials
Plans labour
Decides whether to accept retention
Determines the VAT treatment
Verifies CIS status
Schedules applications
Assesses funding

CIS, VAT and materials do not necessarily reduce profit by the amount they reduce the bank balance. Their timing can still determine whether the business can complete the work.

The strongest construction businesses connect estimating, project delivery, bookkeeping and credit control. They know which projects make money, which projects consume cash and when that cash should return.

Speak to PR Accountants Ltd

PR Accountants Ltd helps contractors, subcontractors, property developers and other construction businesses understand their numbers and plan cash before deadlines become urgent.

Our services include:

Construction bookkeeping
CIS registration and monthly returns
CIS deduction reconciliations
VAT registration and VAT Returns
Domestic reverse-charge reviews
Monthly management accounts
Project and margin reporting
Cashflow forecasts
Debtor and retention reviews
Payroll
Annual accounts
Corporation Tax returns
Self Assessment tax returns
Accounting-software setup and corrections
Tax and business advice

We can review the working-capital cycle, identify where money is being delayed and build a practical cashflow process around your projects, VAT and CIS obligations.

PR Accountants Ltd
Email: info@praccounting.co.uk
Telephone: 0330 043 0792
Website: www.praccounting.co.uk

Official guidance

This article provides general information and does not constitute personalised accounting, tax, legal, finance or insolvency advice. CIS, VAT and cashflow outcomes depend on the legal entity, contracts, VAT liability, payment terms, transactions and individual circumstances. Rules and guidance can change.