Published: 14th December 2025
Running a construction or trades business in the UK comes with a unique set of financial responsibilities. From labour invoices and materials costs to subcontractor payments and HMRC compliance, keeping accurate and compliant books is essential to protect profits, manage cash flow and stay on the right side of UK tax law. In this episode of The BookkeepingPackages Podcast, we break down the fundamentals of bookkeeping for construction and trades businesses, focusing especially on the Construction Industry Scheme — what it is, how to record it, and how to make HMRC compliance part of your regular process.
Whether you’re a sole trader plasterer, a subcontractor electrician, or a growing construction company director, understanding how CIS works and how to record all your transactions can save time, reduce stress and avoid costly HMRC penalties.
What is the Construction Industry Scheme (CIS) and Why It Matters
One of the biggest bookkeeping challenges for construction and trades businesses is understanding the Construction Industry Scheme (CIS). This is an HM Revenue & Customs system that governs how payments to subcontractors must be handled for tax purposes. Under CIS, contractors deduct a proportion of what they pay subcontractors and pass it on to HMRC as an advance payment toward the subcontractor’s tax and National Insurance contributions. GOV.UK
For official, detailed guidance from HMRC about the Construction Industry Scheme, including what it involves and how it applies to your business, visit: https://www.gov.uk/what-is-the-construction-industry-scheme.
Under the scheme:
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Contractors must register with HMRC and verify subcontractors’ status before making payments.
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Subcontractors are subject to tax deductions — typically 20% if registered or 30% if not — based on their gross payments (excluding VAT and materials costs). GOV.UK
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These deductions are then reported to and paid to HMRC, where they count toward a subcontractor’s overall tax bill.
Failing to comply with CIS requirements can lead to penalties, disputes with HMRC, and cash flow problems, which is why it’s critical to understand how CIS impacts your bookkeeping process.
Recording CIS Payments and Deductions Accurately
Bookkeeping for construction work under the CIS isn’t only about tracking income and expenses — it’s also about capturing every element of how you pay and receive payments within the scheme. This includes:
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Gross subcontractor payments — the full amount invoiced (excluding VAT).
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Deductions made — the tax withheld from subcontractor payments and passed to HMRC.
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Details of materials costs — if applicable, which are excluded from deduction calculations. GOV.UK
All of these figures should be logged in your accounting system as separate line items so that your books reflect both the cash actually paid and the amounts withheld for tax.
Keeping these records is a legal requirement, and HMRC may request to see them at any time. You should retain CIS records for at least three years after the end of the tax year to demonstrate compliance. GOV.UK
Subcontractor Verification and Status
Before you make any payment under CIS, you must verify that subcontractors are registered with HMRC and confirm their correct tax status. This determines the rate of deductions and ensures you comply with HMRC rules. GOV.UK
Verification typically requires:
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The subcontractor’s Unique Taxpayer Reference (UTR).
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HMRC verification number showing their status.
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Confirmation of whether they are registered for gross or net payments.
Failing to verify correctly can lead to higher deductions (30% instead of 20%) and potentially costly errors in your bookkeeping.
Monthly Returns and Record Keeping
Under the CIS, contractors must submit monthly returns to HMRC showing all payments and deductions made to subcontractors. These returns usually have deadlines that align with PAYE payments, and digital submissions are increasingly expected under UK tax rules.
Accurate bookkeeping supports timely submission by ensuring that all amounts are recorded and reconciled before the return deadline. Popular accounting software like Xero, QuickBooks, and Sage includes modules to help manage CIS records alongside your general ledger.
Your bookkeeping process should also include:
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Maintaining copies of subcontractor statements.
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Recording payment dates, gross amounts, and deduction figures.
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Reconciling these figures with subcontractor invoices and bank transactions. Pandle
Managing Your Expenses and Materials Costs
In construction and trades, expenses are a significant part of your financial operations. From materials and consumables to equipment hire and subcontractor labour, accurate categorisation and documentation are essential.
Make sure you:
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Record all invoices and receipts with clear descriptions.
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Split material costs from labour where subcontractors are concerned (since CIS deductions don’t apply to certain materials costs). GOV.UK
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Use cloud or digital storage to retain and organise records easily.
Avoiding Common CIS Bookkeeping Mistakes
Even experienced trades businesses can stumble when it comes to CIS bookkeeping. Common issues include:
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Not verifying subcontractors before payment.
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Failing to separate materials and labour in invoices.
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Missing monthly CIS return deadlines.
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Not retaining records for the required period. GOV.UK+1
Regular bookkeeping reviews and good processes help avoid these pitfalls, keep HMRC happy, and minimise stress during tax time.
Conclusion: Accurate Bookkeeping Protects Your Business
For builders and trades businesses, understanding and applying the rules of the Construction Industry Scheme is essential for accurate bookkeeping and long-term financial health. By recording every payment, deduction and subcontractor detail correctly — and maintaining your records — you build a solid foundation for compliance, growth and operational clarity.
If you’d like expert support tailored to construction bookkeeping and CIS compliance, the team at BookkeepingPackages.co.uk is here to help you stay organised and compliant.
About the Author
Stuart Kerr is the founder and lead correspondent at BookkeepingPackages.co.uk, where he helps UK small business owners, freelancers, landlords, charities, and trades businesses manage their financial admin with confidence. Drawing on over a decade of experience in bookkeeping, tax compliance and business finance, Stuart delivers clear, practical guidance that helps organisations stay compliant and grow with clarity.
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