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HMRC internal manual

Business Income Manual

From
HM Revenue & Customs
Updated
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Builders, property dealers & developers: income recognition: retentions

In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.

In their accounts, builders will generally deal with retentions in one of the following ways:

  • include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
  • defer recognition of retentions until their receipt becomes virtually certain.

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.

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. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.

A challenge will only be appropriate in worthwhile cases. For example, 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 (compared with the alternative provisions method). In such cases you should seek advice from an HMRC compliance accountant.

CTISA (Technical) will be pleased to help in cases of doubt or difficulty and should be consulted before listing an appeal for contentious hearing.