Construction Accounting & CIS Reconciliation
CIS deductions, retention, reverse charge VAT, and project cost tracking - a practical UK guide to the bookkeeping challenges unique to construction, and how to reconcile them without losing your mind.
Why This Matters
Construction bookkeeping is a different animal. Every invoice involves a CIS calculation. Retention holds back part of your cash for months. Reverse charge VAT means you never actually receive (or pay) the VAT on many transactions. And every cost needs allocating to the right project. Get any of these wrong and your bank reconciliation, your tax return, and your cash flow projections all fall apart.
This guide walks through each of these challenges in detail - with worked examples - and explains how modern automation can reduce what used to be days of bookkeeping into minutes.
Why Construction Bookkeeping Is Different
Most industries have straightforward bookkeeping: you invoice a client, the client pays, you record the income. Construction adds several layers of complexity that make standard bookkeeping practices inadequate.
CIS Deductions
- Contractors must deduct 20% (registered) or 30% (unregistered) from subcontractor payments
- Monthly CIS returns filed with HMRC
- Deductions offset against PAYE or refunded at year end
Retention
- Typically 5% of each application withheld
- Released 6–12 months after practical completion
- Creates a debtor balance that needs tracking
Project-Based Costing
- Every expense allocated to a specific job
- Materials, labour, plant hire, subcontractors
- Profit margins tracked per project
VAT Reverse Charge
- Since March 2021 for most B2B construction
- Subcontractor invoices show VAT but do not charge it
- Contractor self-accounts for VAT on their return
Each of these factors changes the amount that actually hits your bank account. A £10,000 invoice to a main contractor might result in a bank deposit of just £7,600 after CIS and retention - and that is before timing differences push the payment into a different month entirely. Standard bookkeeping software does not handle these adjustments natively, which is why construction businesses spend disproportionate time on reconciliation.
Understanding CIS Deductions
The Construction Industry Scheme requires contractors to deduct tax at source from payments to subcontractors. If you work as a subcontractor, 20% or 30% of your labour element (materials are excluded from CIS where separately identified) is deducted before you receive payment.
How CIS Works in Practice
- Verification - The contractor verifies the subcontractor with HMRC. The response confirms whether to deduct at 0% (gross payment status), 20% (registered), or 30% (unregistered).
- Deduction - On each payment, the contractor calculates CIS on the labour portion. If the invoice is £5,000 labour and £1,200 materials, CIS at 20% is £1,000 (20% of £5,000 only).
- Payment - The subcontractor receives the invoice total minus the CIS deduction. The contractor pays the deducted amount to HMRC.
- Monthly Return - Contractors file a CIS return by the 19th of each month, detailing all subcontractor payments and deductions.
- Year-End Offset - Subcontractors who are limited companies offset CIS suffered against their corporation tax or PAYE liability. Sole traders reclaim through their Self Assessment.
The Reconciliation Headache
From a bookkeeping perspective, the problem is simple but persistent: the amount on the invoice never matches the amount in the bank. Every single subcontractor payment requires you to account for three figures - the gross invoice, the CIS deduction, and the net payment received. Multiply that by dozens of invoices a month across multiple projects, and the reconciliation workload escalates quickly.
Worked Example: Monthly Subcontractor Reconciliation
Here is a typical month for a plastering subcontractor working across three sites. All invoices are labour-only, CIS at the standard 20% rate, and subject to the domestic reverse charge for VAT.
| Invoice | Client / Site | Gross Labour | CIS (20%) | Net Received | VAT (Rev. Charge) |
|---|---|---|---|---|---|
| INV-041 | Barrington Homes - Plot 12 | £4,200.00 | £840.00 | £3,360.00 | £840.00 |
| INV-042 | Greenway Devs - Phase 2 | £6,500.00 | £1,300.00 | £5,200.00 | £1,300.00 |
| INV-043 | Barrington Homes - Plot 14 | £3,800.00 | £760.00 | £3,040.00 | £760.00 |
| INV-044 | Northfield Contractors | £5,100.00 | £1,020.00 | £4,080.00 | £1,020.00 |
| INV-045 | Greenway Devs - Phase 2 | £2,900.00 | £580.00 | £2,320.00 | £580.00 |
| Monthly Totals | £22,500.00 | £4,500.00 | £18,000.00 | £4,500.00 | |
Reading This Table
The subcontractor invoiced £22,500 of labour this month. Contractors deducted £4,500 in CIS (20%), so only £18,000 appeared as bank deposits. The £4,500 VAT column is the reverse charge amount - it appears on the subcontractor's VAT return as both output and input VAT (a net-zero effect), but no VAT cash actually changes hands.
The £4,500 CIS deducted is not lost money. It is a tax payment on account. At year end, this subcontractor can offset the full £4,500 against their PAYE or corporation tax liability. If more CIS has been deducted than tax owed, HMRC refunds the difference.
Retention Accounting
Retention is standard practice in construction contracts. The client withholds a percentage of each payment (typically 5%, sometimes 3%) as security against defective work. Half is usually released at practical completion and the remainder at the end of the defects liability period, which can be 6–12 months later.
Recording Retention Step by Step
Issue the Application for Payment
Record the full value of work done as revenue. If the application is for £20,000 of completed work, your sales ledger shows £20,000.
Split the Debtor
Post £19,000 (95%) to Trade Debtors and £1,000 (5%) to a Retention Receivable account. This separates the money you expect now from the money held back.
Receive Payment (Minus CIS and Retention)
The client pays £19,000 less 20% CIS on the labour portion. If the entire £19,000 is labour, the bank deposit is £15,200 and £3,800 goes to CIS Deductions Suffered. Allocate against Trade Debtors.
Release of Retention
Months later, the client releases the £1,000 retention. This payment clears the Retention Receivable account. CIS may also apply to the retention release.
Cash Flow Warning
Retention creates a permanent gap between your reported revenue and your received cash. A business turning over £500,000 per year with 5% retention has £25,000 perpetually outstanding. This is working capital you cannot use. Track it carefully and chase releases promptly - late retention releases are one of the most common cash flow problems in construction.
Reconciling Construction Finances
When you sit down to reconcile a construction business's bank account, every deposit and payment has layers. Here is a systematic approach.
1. Match Net Payments to Invoices
Each bank deposit from a contractor will be the invoice total, minus CIS, minus retention, and with no VAT (if reverse charge applies). Start by matching each deposit to its source invoice. The arithmetic should always work out:
Bank Deposit = Gross Invoice − CIS Deduction − Retention − Reverse Charge VAT
2. Track CIS Deductions for Year-End
Maintain a CIS Deductions Suffered account in your chart of accounts. Every time a contractor deducts CIS from a payment, post the deduction amount here. At year end, the balance of this account represents the tax credits available to offset against your PAYE or corporation tax bill.
Cross-reference your records against the CIS statements (form CIS25) you receive from each contractor. Discrepancies between your records and what HMRC holds can delay refunds significantly.
3. Handle Reverse Charge VAT
Under the domestic reverse charge, the subcontractor does not charge or collect VAT. Instead, the contractor accounts for the VAT on their own return. For the subcontractor's bookkeeping, the reverse charge VAT appears as both an output and an input on the VAT return - a wash. But it must be recorded correctly, or the return figures will be wrong.
In your accounting software, use the correct reverse charge VAT code (not the standard rate). The invoice total on your sales ledger should be the net amount excluding VAT, with the reverse charge noted.
4. Allocate Costs to Projects
Every bank transaction - materials from Jewson, plant hire from Speedy, fuel for the van, subcontractor payments on your own jobs - needs tagging to the right project. Without this, you cannot calculate project profitability, which is the single most important metric for a construction business.
Use tracking categories, departments, or project codes in your accounting platform. When reconciling, ensure every transaction has a project allocation before marking it as matched.
Where Construction Reconciliation Goes Wrong
The Five Most Common Errors
- Booking gross instead of net - Recording the full invoice amount as income without separating the CIS deduction inflates your apparent revenue and creates a permanent reconciliation gap.
- Forgetting retention - Marking an invoice as fully paid when 5% is still being held creates a debtor balance that silently accumulates.
- Wrong VAT treatment - Using standard rate VAT instead of the reverse charge code means you are accounting for VAT you never received, throwing off your VAT return.
- Misallocating costs between projects - Materials purchased for Site A coded to Site B distorts profitability on both jobs and leads to bad quoting decisions on future work.
- Not reconciling CIS statements to HMRC records - If a contractor deducts CIS but files incorrect figures with HMRC, you will not receive the correct credit. Check every CIS25 statement.
Automating Construction Bookkeeping
The patterns in construction bookkeeping - CIS deductions, materials from the same merchants, regular subcontractor payments, plant hire from familiar suppliers - are exactly the type of repetitive, rules-based work that benefits most from intelligent automation.
How CodeIQ Handles Construction Transactions
CodeIQ is our intelligent automated AI bookkeeper. It connects to your accounting platform (Xero, QuickBooks, Sage, or Pandle), learns your existing chart of accounts and general ledger history, and then classifies new bank transactions automatically.
For construction businesses, this means CodeIQ learns that payments from "Barrington Homes" are subcontractor income subject to CIS, that "Jewson" transactions go to Materials, that "Speedy Hire" is Plant & Equipment, and that your regular fuel purchases are Motor Expenses. It classifies VAT correctly - including reverse charge - and can process an entire month of transactions in around two minutes.
Every classification is presented for your review before posting. You approve, adjust where needed, and CodeIQ learns from your corrections for next time. The more you use it, the more accurate it becomes.
Reconciling with ReconcileIQ
ReconcileIQ handles the bank reconciliation side. Upload your bank statement (CSV, PDF, or Excel) alongside your accounting software export, and ReconcileIQ matches transactions intelligently - accounting for the differences created by CIS deductions, retention, and timing delays.
For construction businesses, the ability to match net bank deposits against gross invoices is particularly valuable. ReconcileIQ identifies the CIS deduction as the matching difference and flags any invoices where the arithmetic does not add up, so you can investigate before the month-end close.
Together, CodeIQ and ReconcileIQ cover the full construction bookkeeping workflow: classify and code transactions, reconcile them against the bank, and post the results back to your accounting platform.
A Note on Progress Billing
Construction projects are typically billed through applications for payment (sometimes called interim valuations or progress claims). Unlike a standard invoice for completed goods, an application for payment covers work done to date, often valued by a quantity surveyor.
The process usually follows this sequence:
Application Submitted
The subcontractor submits a valuation of work completed in the period.
Payment Notice Issued
The contractor (or their QS) issues a payment notice, often adjusting the claimed amount. This is the figure that becomes payable.
Payment Made (Minus Deductions)
Payment is made after deducting CIS and retention. The final bank deposit may be significantly less than the original application.
From a bookkeeping perspective, you need to record the revenue at the payment notice amount (not the application amount), track the difference if the valuation was reduced, and then reconcile the bank deposit against the adjusted figure minus CIS and retention. It is a multi-step process, and each step is an opportunity for error if done manually.
Simplify Your Construction Bookkeeping
CIS deductions, retention tracking, reverse charge VAT, project costing - let our tools handle the complexity so you can focus on running your projects.
Try The IQ Suite FreeFrequently Asked Questions
How do I reconcile CIS deductions with my bank statements?
Compare each subcontractor invoice's gross amount against the net payment received in your bank statement. The difference should equal exactly 20% (for registered subcontractors) or 30% (for unregistered). Track each CIS deduction in a separate nominal code so you can offset the total against your PAYE liability at year end. Tools like ReconcileIQ can automate the matching of net bank deposits to gross invoices.
What is the best bookkeeping software for construction businesses?
The best bookkeeping setup for construction businesses combines a standard accounting platform (Xero, QuickBooks, or Sage) with specialised automation. CodeIQ acts as an intelligent AI bookkeeper that learns your construction chart of accounts, automatically classifies CIS deductions, materials, plant hire and subcontractor costs, and posts coded transactions back to your platform in minutes rather than hours.
How do I account for retention in construction accounting?
When you invoice a client, record the full invoice amount as revenue and the retention portion (typically 5%) as a retention receivable or debtor. When the client pays, the amount received will be the invoice total minus retention. When the retention is released (usually 6–12 months after practical completion), record the payment against the retention receivable account. This keeps your revenue accurate while tracking the cash you are owed.
Can AI automate CIS and construction bookkeeping?
Yes. AI-powered tools like CodeIQ learn from your existing general ledger to recognise construction-specific transactions such as subcontractor payments, materials purchases, plant hire, and CIS deductions. Once trained on your chart of accounts, CodeIQ can classify an entire month of bank transactions in around two minutes, assign the correct VAT treatment including reverse charge, and post everything back to your accounting platform for review.