The property and construction sectors are dynamic sectors with unique accounting challenges. And, whether you’re a contractor, developer, or property manager, understanding the accounting essentials of your sector can significantly impact your business’s financial health.
This blog post will explore key accounting considerations, including the Construction Industry Scheme (CIS), VAT complexities, cash flow management, and tax planning. By the end, you should feel at least a bit more comfortable with your accounting duties.
Why you need to take your accounting seriously
Accounting is a crucial task for any business. It can’t be avoided, and more importantly, it helps businesses navigate two parts of a business:
- Remaining compliant: By ensuring that your financial records are accurate and submitted on time, businesses can navigate sector-specific rules, including the Construction Industry Scheme (CIS) and VAT. This will keep you out of trouble with HMRC, ultimately preventing costly penalties.
- Supporting business growth: Robust accounting practices can help businesses grow by allowing them to, for example, identify tax-saving opportunities and manage cashflow effectively, enabling companies to reinvest in growth initiatives. Regular audits and compliance checks will also minimise the risk of penalties, and foster transparency and trust with stakeholders.
Key accounting tasks for property and construction businesses
CIS
The CIS is a critical framework for construction businesses. Designed to combat tax evasion, it requires contractors to deduct money from payments to subcontractors and pass it on to HMRC as that subcontractor’s income tax and National Insurance contributions.
To comply with CIS regulations, you need to make sure you’re doing the following:
- Register: Contractors and subcontractors must register for CIS. Failing to do so can result in higher tax deductions (30% instead of the standard 20% for registered subcontractors).
- Verify: Before making payments to subcontractors, contractors should verify the subcontractors’ status with HMRC to determine the correct deduction rate.
- Keep records: Accurate records of all payments and deductions must be maintained, including invoices, payment schedules, and subcontractor details. This is vital for compliance and future audits.
- Report: Contractors have to submit monthly returns to HMRC detailing payments made to subcontractors. Missed deadlines may result in penalties.
VAT complexities
VAT is another accounting complexity that affects many construction and property businesses. VAT is a tax levied on the sale of certain goods and services. Businesses charge it to their customers and then pass on the money to HMRC. The standard VAT rate is 20%, but specific activities may be subject to reduced rates or exemptions.
Businesses with an annual turnover of £90,000 or more must register for VAT. However, there are advantages to registering early. For example, when you’re VAT-registered, you can claim back the VAT that your business pays when purchasing goods and services. With high input costs, construction and property businesses especially stand to gain from this arrangement.
To pay VAT to HMRC, businesses must file digital returns every quarter detailing the tax they owe to HMRC and what they are reclaiming.
Cashflow management
Cashflow is often a major concern in the construction industry, where project timelines can lead to delays in payments. Effective cash flow management is therefore essential for maintaining the financial health of your business, so it’s important to review your accounting data to see where you can make improvements.
Strategies for effective cashflow management include:
- Regular forecasting: Create forecasts to anticipate future income and expenses. This will help you identify potential cash shortages.
- Prompt invoicing: Invoice clients as soon as work is completed or milestones are reached. Clearly outline payment terms to encourage timely payments, too.
- Payment plans: Consider establishing flexible payment plans with clients to help them pay on time.
Tax planning
By having effective tax planning in place, businesses can maximise profits by legally paying less in taxes. Fortunately for businesses in the property and construction sector, there are a number of tax reliefs and incentives to be taken advantage of:
- Capital allowances allowable expenses: You can deduct the cost of long-life assets from your pre-tax profit to reduce your tax bill. You can also claim the cost of everyday purchases (known as allowable expenses).
- Research and development (R&D) tax credits: If your projects involve innovation or even disproving the viability of a potential method or technology, consider applying for R&D tax credits. These can significantly offset tax liabilities.
- Using losses: If your business incurs losses, you may be able to carry them forward or back to offset profits in other periods. This strategy can provide substantial tax relief.
Talk to an accountant
In the property and construction sectors, effective accounting is not just a necessity — it’s a strategic tool that can significantly impact your business’s success. From navigating the intricacies of the CIS and managing complex VAT rules to ensuring healthy cashflow and optimising your tax strategy, getting your accounting right is essential for staying compliant and fostering growth.
Property developers, contractors, and managers face complex challenges, but with a solid accounting foundation, these challenges can become opportunities. Accurate financial management helps you maintain compliance, avoid costly penalties, and ensure that your cash flow remains steady, all while making the most of tax reliefs and incentives available to your business.
While these accounting tasks are essential, they’re also time-consuming and can quickly become overwhelming if you don’t have the right support. By working with a knowledgeable accountant who understands the unique demands of the property and construction sectors, you can ensure that your financial records are in order, compliance is maintained, and your business is set up for long-term success.
Accounting is a tough and time-consuming task that requires special expertise. Your efforts are better spent on your business, staff, and clients. So, get in touch with us today to discover how we can help you streamline your accounting processes and set your business up for sustainable growth.