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:
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
local accountancy advice and adopt the approach indicated at
BIM31019.
CT&VAT (Technical) will be pleased to help in cases of
doubt or difficulty and should be consulted before listing an
appeal for contentious hearing.
