Dealing with builders retentions
It is common practise in the building industry for a final percentage of an amount due to a builder to be withheld as a retention. This payment allows the customer to retain part of the total payment due until satisfied that the builder has completed all the activities required of them under contract at an agreed level of satisfaction.
Typically, this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.
HMRC accepts that 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, or
- defer recognition of retentions until their receipt becomes virtually certain.
HMRC is prepared to accept either of these options for tax purposes as an accepted treatment unless an unrealistically conservative view has been taken. In some cases, these monies are never paid. HMRC point out that, 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.