Retention in construction: CIS, VAT and your books

What is retention in construction?

It is money held back from what you are owed, as security that your work is right. HMRC describes it this way: Some contracts relating to construction operations allow the contractor to retain a portion of the contract price for a period after the construction work has been completed.

It is paid at the end of that period if the work holds up: If the contractor is satisfied at the end of this period the payment withheld is released to the subcontractor. HMRC gives the usual length too: Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.

How much is held is whatever your contract says. HMRC gives no typical amount; its VAT guidance says only: Retention clauses allow the customer to hold back a proportion of the contract price once the work has been completed, pending confirmation that the supplier has done the work properly and has rectified any immediate faults that might be found.

How the deduction is worked out each month is in how CIS works.

Does retention actually get paid?

Often not, and HMRC says so in the manual its own inspectors use:

“In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid.”

The government found the same when it asked the industry: the responses showed that the withheld money is often subject to unjustified late, partial, and non-payment. That is why knowing exactly what is held, by whom and until when matters so much.

Is retention being banned?

The government plans to ban it. Its response to the late payment consultation says we propose to ban the practice of deducting and withholding retention payments under the terms of a construction contract, consulting on its implementation.

It has not given a date. In its words: We will introduce new legislation as soon as Parliamentary time allows. Until a ban is law and in force, the retention terms in the contracts you have signed still apply, so the money already held still has to be tracked and chased.

The Budget on 28 October 2026 gave no date either. It said nothing about retention payments, only that the government is committed to tackling late payments to support small business cashflow.

Is CIS deducted from retention?

Yes, but only when the retention is paid, not when it is held back. The contractor deducts CIS from what they actually pay you, so the part they keep is not deducted from until it is released.

• Retention is not a CIS deduction. It is money not yet paid, and it is treated like any other payment.
• The rate is the one you are on when the retention is released, not the one you were on when you did the work.
• A release can be partly labour and partly materials, so it is split the same way as any other payment.

Source: HMRC manual CISR15040, which says There are no special rules for retention payments. They are treated in the same way as any other payments.

The rate can change in between, and it can go either way. Retention periods can last for years and it may be that in this period the subcontractor's circumstances change. If you have lost gross payment status, an old retention comes back with a deduction on it. And in HMRC’s words, On the other hand, a subcontractor who was only entitled to be paid under deduction when the work was done may have qualified for gross payment by the time payment is made entitling them to receive the payment in full.

If a release covers labour and materials, only the labour is deducted from. What counts as materials under CIS

When is VAT due on retention?

When you are paid it, or when you send a VAT invoice for it, whichever comes first.

• Unlike CIS, VAT does have a special rule for retention.
• You do not owe the VAT on the retention until you are paid it, or until you send a VAT invoice for it.
• The retention carries the same VAT rate as the rest of that job.

Source: HMRC, VAT Notice 708 §23.1.2: The tax point for the retention element of the contract is delayed until you either receive the retention payment or issue a VAT invoice for it, whichever occurs first.

If your contract pays you in stages, the normal VAT rule already works the same way. VAT Notice 708 says that for those contracts the tax point for your supply is the earlier of receipt of payment or the issue of a VAT invoice. There's no basic tax point when the work is completed.

How do CIS and VAT work on a job with retention? A worked example

On a £12,000 payment with £450 held back, CIS and VAT are worked out on the £11,550 paid now, and on the £450 only when it is released.

You are a VAT registered subcontractor, verified at 20%, and the job is all labour. Your work is valued at £12,000 and the contractor holds back £450. That amount is just this example; your contract sets yours. This job is one where you charge VAT, which not every CIS job is. Check whether your invoice should carry VAT

At the interim payment, the £450 held back has no CIS taken off it and no VAT due on it. The contractor puts £11,550 on their CIS return for that month, not £12,000. The VAT added and the CIS taken off happen to be the same amount here, because both are twenty percent. They are still two separate taxes, on two separate returns.

When the retention is released, the deduction depends on your status that day. Still at 20%, £90 comes off. If you hold gross payment status by then, nothing does, and £540 reaches your bank including the VAT.

How does retention go in the books?

One of two ways, and HMRC accepts both. Its manual says In their accounts, builders will generally deal with retentions in one of the following ways:

• Count it as income now: include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment. In the example, the full £12,000 is turnover, with £450 owed to you.
• Count it when it is as good as certain: defer recognition of retentions until their receipt becomes virtually certain. In the example, £11,550 is turnover now and the £450 is added when it is.

Source: HMRC manual BIM51520: Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.

HMRC only questions the second way in cases like this: where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect. Which way suits you depends on how reliably you get paid, and that is a decision for you and whoever prepares your accounts. Either way, each retention has to be written down when it is held, not found at the year end.

How do you get retention released?

Know when each one is due, ask for it in writing, and follow it up until it is paid. Step by step:

1. Write down every retention when it is held. The job, who is holding it, how much, and the date your contract says it is due back.
2. Put the release dates in your diary. Your contract sets when it is due, for example at completion or at the end of the defects period.
3. Ask for it in writing on the day it is due. Say which job, how much, and the date it fell due. Keep a copy.
4. Think before you send a VAT invoice for it. A VAT invoice fixes the VAT date, so the VAT is due from then whether or not you have been paid.
5. Follow up, and keep a record of every reply. If defects are raised, get them listed, put them right, and ask again once they are signed off.

If you are the contractor releasing retention, check the subcontractor’s status before you pay it, because the rate is the one that applies on the day of payment. How to verify a subcontractor