What happens to retention payments for tax purposes?

Retentions are taxed on the same basis as the rest of your income. Under the cash basis you are taxed when the retention is released to you. Under accruals you are taxed when you become entitled to it under the contract, which can be earlier. CIS is deducted when the retention is paid.

What a retention is

A main contractor holds back a percentage of your payments, often around 5%, until the job passes inspection or a defects period ends. That can be six or twelve months later.

Which basis are you on?

• Cash basis: the default for most sole traders. You report income when you receive it, so the retention is taxed in the year it is released.
• Accruals basis: used by companies and by sole traders who opt out of the cash basis. Income is recognised when you are entitled to it, subject to how your contract and accounts treat conditions attached to the retention.

VAT on retentions follows its own timing rules, so do not assume it matches your income tax timing.

CIS on release

When the retention is paid, the contractor deducts CIS in the normal way from that payment. You receive the net amount.

Worked example

What to do

1. Keep a schedule of every retention: job, amount, release date, contractor.
2. Diarise the release date and chase it.
3. Check which basis you are on.
4. Do not treat a held retention as spare cash.

Common mistakes

• Forgetting retentions after a job is finished.
• Assuming they are always taxed on release.
• Not planning for CIS on the release payment.

Sources: GOV.UK: CIS for subcontractors · GOV.UK: cash basis for sole traders