Retention payments in the CIS context are sums withheld by a main contractor from the amounts due to a subcontractor until a defects period or a practical completion milestone has passed. The question of when CIS deductions apply to a retention is one of the most commonly misunderstood aspects of the scheme for subcontractors and contractors managing long-running construction projects.

HMRC's position is that a CIS deduction is triggered when a payment is actually made, not when the entitlement to be paid arises under the contract. This means that the deduction on a retention sum does not arise when the main contract reaches practical completion (when the subcontractor becomes contractually entitled to the retention). It arises when the contractor actually releases the retention and makes the payment. At that point, the contractor must apply the subcontractor's verified deduction rate (0%, 20% or 30%) to the labour element of the retention in the same way as any other CIS payment.

Practical implications for subcontractors:

  • A retention released in tax year 2026/27 is subject to 2026/27 deduction rates, even if the original contract ran in an earlier year.
  • The CIS deduction on the retention is an advance against the subcontractor's Self Assessment or Corporation Tax liability for the year in which the retention is received, which may differ from the year in which the bulk of the contract payments were received.
  • Subcontractors should ensure that any CIS deduction statement they receive from the contractor covers retention payments separately, so that the deductions can be reconciled correctly with their annual tax position.

For limited-company subcontractors, CIS deductions on retentions (like all CIS deductions) can be offset against PAYE and NIC liabilities in real time through the Employer Payment Summary, rather than waiting for a Corporation Tax repayment. Sole-trader subcontractors reclaim overpaid CIS, including deductions on retentions, through their Self Assessment return after the tax year.

The EPS real-time reclaim route for limited companies is explained at CIS for limited companies: how the EPS reclaim works. The CIS deduction base (labour only, never materials) is set out at CIS deduction rates explained.