The construction sector is a major part of the UK economy, contributing – according to the Office for National Statistics (ONS) – over £130bn to national output in recent years. Yet, firms in this sector often contend with a range of accounting problems. We understand that issues such as cashflow volatility, project-based accounting and compliance with schemes like the Construction Industry Scheme (CIS) can be persistent barriers that can cause accounting challenges in the construction industry.
This blog aims to explain these challenges, then suggest some effective ways to address them. We at Venthams work with a wide variety of construction clients, and we see how staying up to date with tax legislation and best practices helps businesses protect profitability and maintain compliance.
The scale of the construction sector in the UK
Construction generates a significant share of UK GDP and supports substantial employment. According to the ONS, the sector accounts for roughly 7% of the UK’s total economic output and employs nearly 2.5m people. These figures highlight the considerable impact of the industry and underscore the importance of effective financial management. In the latest tax year, careful attention to tax thresholds and rates can help construction businesses retain as much of their income as possible.
Cashflow fluctuations
Cashflow is often unpredictable because construction projects usually come with large up-front costs, staggered payments and occasional delays. A single major project can tie up substantial capital, and any hold-ups in client payment schedules put additional pressure on day-to-day finances. This can create difficulties in meeting payroll, tax obligations or supplier invoices.
One way to address this is to set up more robust payment terms with customers and subcontractors. You might consider using payment schedules aligned with project milestones. If a project is expected to last several months, interim billing can help maintain a more even flow of revenue. It may also be wise to keep a contingency fund or use invoice financing services. Such approaches can make budgeting for salaries, materials and taxes less stressful.
Project-based accounting
The construction industry differs from sectors that provide a constant flow of goods and services, sometimes causing accounting challenges. Construction often centres on project-based contracts, which can involve multiple teams, varied timelines and distinct budget allocations. Keeping track of each project’s costs and revenues in the 2025/26 tax year will remain important, especially given the continued freeze on many tax allowances. For instance, the main personal allowance is still set at £12,570, which means many employees may pay more tax if they see increased earnings.
Project-based accounting software can simplify cost allocation, time tracking and margin analysis. Many platforms integrate with cloud-based tools, giving real-time insights into labour hours, material expenses and other overheads. This clarity can help managers spot early signs of overspending or shortfalls in revenue collection. If a project is nearing budget limits, timely intervention can prevent unexpected losses.
CIS compliance in 2025/26
The CIS is designed to regulate tax deductions from payments made to subcontractors. Registered subcontractors typically have 20% deducted, while unregistered subcontractors face 30%. Accurately applying these deductions – and then reporting them to HMRC – can be burdensome for busy teams. Mistakes, such as classifying a worker incorrectly or missing monthly submission deadlines, can result in fines or other penalties.
Maintaining careful records is essential. Consider creating a standard checklist to verify each subcontractor’s CIS status before any engagement begins. Software solutions can automate monthly CIS returns and generate statements, reducing the chance of human error.
VAT issues in construction
VAT in the construction sector can be difficult, especially if you work on new builds, renovations or repairs. The domestic reverse charge rules for certain building and construction services remain in place, meaning you may be responsible for accounting for VAT rather than your supplier. In 2025/26, the standard VAT rate is 20%, and various reduced rates may apply depending on the type of work.
This can lead to confusion and accounting challenges if you do not keep track of the appropriate rates and your role as either the supplier or customer in a project. It is vital to check whether a particular job involves zero-rated or reduced-rate services. Consistent reviews of invoices and up-to-date bookkeeping systems help ensure that each transaction is classified under the correct VAT treatment.
Managing subcontractors effectively
Many construction firms rely on a pool of subcontractors, which can change from project to project. This dynamic approach can reduce overheads, but it can also lead to confusion about tax status, insurance and responsibilities. It is advisable to maintain a central registry of all subcontractors, complete with CIS verification, payment details and contract terms.
Creating clear subcontractor agreements can help avoid disputes and non-payment issues. The agreement should outline responsibilities, payment terms and obligations under CIS. If you find yourself juggling many subcontractors, a payroll solution tailored for the construction industry can track each worker’s hours, handle deductions and generate itemised payslips. This level of transparency not only meets HMRC requirements but also fosters trust and clearer communication with subcontractors.
Adopting technology
The adoption of technology can streamline much of the finance function for construction businesses. Cloud-based platforms allow real-time data sharing among site managers, office teams and accountants. Digital invoices and automated payment reminders help reduce late payments. Automated alerts can notify you when a project budget threshold is reached or when a CIS return is due.
In our experience, integrating project management tools with accounting systems gives a clear view of performance. You can see whether a job is on track, if it is hitting profit targets or if additional resources are needed. This proactive approach helps construction owners act quickly to adjust spending, change subcontractor arrangements or seek new finance options.
The role of expert financial support
With the 2025/26 tax year introducing no major changes to the frozen personal allowance and higher thresholds, many construction businesses might assume that everything is straightforward. Yet, the sector remains under pressure from cost inflation, labour shortages and unpredictable schedules. Engaging a professional accountant can save time and reduce mistakes.
An adviser will keep your business in line with CIS, handle VAT returns and implement a cashflow strategy that accounts for your ongoing projects. You may also benefit from restructuring your business, whether through forming a new limited company or a joint venture arrangement. This can depend on your projected revenue and profit levels; guidance from an experienced accountant can reveal overlooked allowances or reliefs.
Summing it all up
Accounting for construction firms requires both general tax knowledge and sector-specific experience. Cashflow remains a leading worry, followed by project-based accounting and CIS compliance. By adopting digital platforms, refining project costing and working closely with experienced professionals, businesses can address common hurdles and stay competitive.
We are here to help you set up robust processes that will support your business in 2025/26 and beyond. Talk to us about your accounting challenges in the construction industry, reducing your tax obligations and adopting systems that give you better control over project-based costs. Our team is ready to help you.