Construction Sector

---
name: construction-sector
description: "Use this skill whenever a construction contractor, subcontractor, developer, or design-build firm asks about sector-specific tax / accounting. Trigger on phrases like \"construction industry scheme\", \"CIS\", \"CIS deduction\", \"reverse charge construction VAT\", \"domestic reverse charge construction services\", \"developer's relief\", \"long-term contract\", \"percentage of completion\", \"completed contract\", \"ASC 606 construction\", \"uninstalled materials\", \"retention\", \"subcontractor 1099\", \"USDOL prevailing wage\", \"Davis-Bacon\", \"construction VAT zero-rate new residential\", or any construction-sector tax question. Covers UK Construction Industry Scheme (CIS), UK domestic reverse charge VAT for construction services (effective 1 March 2021), US construction tax (long-term contracts under IRC §460; percentage-of-completion-capitalisable; small contractor exception), EU developer reliefs and new-build zero/reduced VAT rates, retentions and progress billing accounting. Does NOT cover: construction s"
license: "AGPL-3.0-or-later (code) / OpenAccountants Guide License v1.0 (content)"
metadata:
  source: openaccountants
  openaccountants_url: "https://www.openaccountants.com/skills/construction-sector"
  jurisdiction: "GLOBAL"
  tax_year: "2025"
  last_updated: "2026-10-23"
---

# Construction Sector

## What this file is

A sector overlay for construction contractors, subcontractors, developers, and design-build firms.

## Section 1 — Revenue recognition for long-term contracts

### 1.1 IFRS 15 / ASC 606

- **Performance obligation satisfied over time** — if any of: Customer simultaneously receives and consumes the benefits (typically for routine services); Work creates or enhances an asset the customer controls; No alternative use to seller + enforceable right to payment for work performed to date  _([T1])_
- **Input method** — proportion of costs incurred to total expected costs — most common for construction.  _([T1])_
- **Output method** — units produced / milestones / surveys — used where measurable units.
- **Uninstalled materials** — exclude from cost-to-cost calculation to avoid overstating progress (IFRS 15 IE19 example).  _([T1])_

### 1.2 US tax — long-term contracts (IRC §460)

- **Long-term contract** — one not completed within the tax year started.  _([T1] IRC §460)_
- **Percentage of Completion Method (PCM)** — required for most contracts; based on cost-to-cost.  _([T1])_
- **Small Contractor Exception** — exempt from PCM if: Average annual gross receipts ≤ USD 30m (2025; indexed); Contract estimated to complete within 2 years  _([T1])_

Small contractor may use Completed Contract Method (CCM) or Cash method for short-duration contracts.

- **Home Construction Contract Exception** — residential construction not required to use PCM.  _([T1])_

### 1.3 Look-back interest (US)

- **§460(b)(2) look-back interest** — at completion of long-term contract, recompute PCM based on actual rather than estimated costs; if difference creates over- or under-payment, interest computed.  _([T1] §460(b)(2))_

## Section 2 — UK Construction Industry Scheme (CIS)

- **CIS overview** — A withholding regime for payments by contractors to subcontractors in construction operations.  _([T1])_

### 2.1 Contractor obligations

- **Verify subcontractor with HMRC** — Contractor must verify subcontractor with HMRC
- **Gross payment status deduction** — 0% percent
- **Registered subcontractor deduction** — 20% percent
- **Unregistered subcontractor deduction** — 30% percent
- **Monthly CIS return (CIS300)** — by 19th of month
- **Payment of CIS deducted** — by 22nd (electronic) / 19th (cheque)

### 2.2 Subcontractor

- **Register as contractor** — if employs other subbies
- **Gross payment status turnover threshold** — GBP 30k per individual / GBP 30k per partner / GBP 200k per company GBP
- **Recover CIS deductions** — Recover CIS deductions against own tax liability

### 2.3 Scope

- **Construction operations** — include site preparation, demolition, installation, building, painting/decorating, alteration. Excludes architecture, engineering, surveying.  _([T1])_
- **Mixed contracts** — full CIS applies unless the construction element is incidental and minor.  _([T1])_

## Section 3 — UK Domestic Reverse Charge for Construction VAT

- **Effective date and applicability** — Effective 1 March 2021 — domestic reverse charge applies to most construction services in the UK construction supply chain (subject to certain exceptions for end-user / intermediary supplier).  _([T1])_

### 3.1 Mechanics

- **Invoice notation** — Supplier issues invoice without VAT (notation: "reverse charge applies; customer pays VAT directly")
- **Customer VAT accounting** — Customer accounts for output VAT on their return AND recovers as input VAT (subject to standard rules)
- **Net cash effect** — nil for customer
- **Disadvantages** — smaller supplier cash flow worsens (no VAT on receipts)

### 3.2 Scope

- **Reverse charge scope** — Same as CIS for "construction services" between VAT-registered parties — supplier must charge reverse charge to other contractors. Excludes: Supplies to "end-users" (the final customer in the chain — typically the developer or building owner); Supplies to "intermediary suppliers" (those who acquire and on-supply construction services to end-users)  _([T1])_

### 3.3 End-user / intermediary supplier notification

- **Notification requirement** — End-user / intermediary must notify supplier in writing; failure to notify means supplier should charge VAT normally.

## Section 4 — Construction VAT

### 4.1 New-build residential

- **UK** — Zero-rated (Item 2(a) Group 5 Schedule 8 VATA)  _([T1] Item 2(a) Group 5 Schedule 8 VATA)_
- **France new-build residential VAT** — Reduced rate 5.5% for social housing (HLM); 10% for certain renovations  _([T1])_
- **Germany new-build residential VAT** — Standard 19% on most; some construction services in residential sector exempt  _([T1])_
- **Italy new-build residential VAT** — 4% on first-home purchase; 10% on non-first-home new build  _([T1])_
- **Spain new-build residential VAT** — Reduced 10% on new residential  _([T1])_

### 4.2 Renovation

- **UK renovation VAT** — Reduced rate 5% for certain residential renovation (over-2-years empty; energy-saving materials)  _([T1])_
- **EU renovation VAT** — Reduced rates per Annex III PVD allowed  _([T1])_

### 4.3 Land

- **Land VAT treatment** — Most jurisdictions exempt sale of unimproved land. UK option to tax permitted for commercial land.  _([T1])_

### 5.1 Retention

- **Retention practice and accounting** — Construction contracts typically retain 5-10% of each progress payment for defects liability period. Accounting: Contract asset (under IFRS 15 / ASC 606) for amount earned but not billed; Retention receivable recognised when retention released; Bad debt provision for retention if collection uncertain  _([T1])_

### 5.2 Progress billing

- **Progress billing treatment** — Issue progress invoice based on completion; Recognise revenue on % completion (not invoice timing); Variance between billed amount and earned revenue → contract asset (earned > billed) or contract liability (billed > earned)  _([T1])_

### 5.3 Australian worked WIP review: cost-to-cost

Apply this example only after a reviewer establishes the contract, performance obligations,
over-time recognition criteria and a cost input method that faithfully depicts progress under
AASB 15. It is a financial reporting workpaper, not an Australian income-tax calculation. Identify
the reporting period, currency, contract version, approved modifications, variable consideration
assessment, costs to date, estimate to complete, prior recognised revenue and cumulative billings.
Missing estimates or an unassessed recognition basis leave the calculation incomplete.

**Fabricated case, AUD, cumulative at the reporting date:** one contract and one performance
obligation qualify for over-time recognition. The transaction price is $1,000,000. A separate
$100,000 unapproved variation is excluded in full on the reviewer's supplied enforceability and
variable-consideration assessment; no automatic percentage of an unapproved claim is included.
Costs incurred are $320,000, including $20,000 of abnormal wasted material that does not depict
progress and was not reflected in the contract price. The remaining eligible costs to complete
are $300,000. Assume there are no receipts, advances or other contract balances beyond those
described below. There are no uninstalled materials, capitalised contract costs or other adjustments
in this example. All incurred costs are expensed here.

| Calculation | Working | Result |
| --- | --- | --- |
| Eligible costs incurred | $320,000 less $20,000 abnormal waste | $300,000 |
| Eligible total costs | $300,000 incurred plus $300,000 to complete | $600,000 |
| Progress | $300,000 / $600,000 | 50% |
| Cumulative revenue | $1,000,000 x 50% | $500,000 |
| Current-period revenue, if prior cumulative revenue was $450,000 | $500,000 less $450,000 | $50,000 |
| Cumulative margin under the stated expense assumption | $500,000 less $320,000 | $180,000 |
| Forecast total margin, including abnormal waste | $1,000,000 less ($320,000 + $300,000) | $380,000 |
| Margin fade from a prior forecast of $400,000 | $380,000 less $400,000 | $20,000 decrease |

Assume cumulative billings of $450,000 are unconditional receivables and the remaining earned
consideration is conditional on further performance. The unbilled contract asset is $50,000;
any unpaid billed receivable is presented separately. If the otherwise identical contract had
billings of $600,000, it would instead have a $100,000 contract liability. Apply the presentation
assessment at the contract level, including any required contract combination; do not offset an
asset on one unrelated contract against a liability on another.

**Reviewer controls and acceptance cases:**

- Removing the abnormal waste from progress does not erase the expense or improve the forecast
  margin. Including it in both progress numerator and denominator would give $320,000 / $620,000
  and would not depict progress on the stated facts.
- Do not treat every uninstalled-material cost as zero revenue. AASB 15 B19(b) can require revenue
  equal to the cost of transferred goods when its conditions are met. Assess control, procurement
  and the relevant conditions separately before adjusting progress and revenue.
- An unsupported estimate to complete, missing prior cumulative revenue or unresolved variation
  assessment must remain visible. Do not default missing costs to zero or call the margin verified.
- Reconcile contract revenue, billings, assets/liabilities and incurred costs to the ledger. Explain
  changes in estimate and assess loss-making contracts under applicable requirements separately;
  this example does not calculate an onerous-contract provision or tax adjustment.

Primary authority: [AASB 15, December 2022 compilation](https://standards.aasb.gov.au/aasb-15-dec-2022),
paragraphs 18-19 and 22-35 (modifications and performance obligations), 39-45 and B18-B19
(progress), 50-59 (variable consideration), 98(b) (waste) and 105-109 (presentation). Check the
[AASB standards index](https://standards.aasb.gov.au/accounting-standards) for the compilation and
amendments applicable to the reporting period. As checked on 21 October 2026, the December 2022
compilation must be read with amendments applicable from 1 July 2026;
[AASB 2022-9, paragraph 18](https://www.legislation.gov.au/F2023L00015/asmade/2023-01-04/text/original/pdf)
deletes Aus5.3, the public-sector-insurance exception, without changing this example's provisions.
The amounts above are fabricated arithmetic, not statutory thresholds.

## Section 6 — Subcontractor classification

- **Employment vs self-employed status** — material in construction: US: §530 relief; misclassification penalties; specific Department of Labor (Davis-Bacon) prevailing wage requirements on federal contracts; UK: IR35 test for personal service companies; off-payroll worker rules; Many jurisdictions: "deemed employment" tests for construction subcontractors  _([T1])_

## Section 7 — Reviewer brief

1. Contract register — every active project
2. Revenue recognition — PCM input method calculation per contract
3. Uninstalled materials exclusion documented
4. CIS register (UK) — subcontractor list with status, deductions, monthly returns
5. Domestic reverse charge VAT (UK) — supply chain map, end-user notifications
6. New-build VAT zero/reduced rate claim support
7. Contract assets / liabilities reconciliation
8. Retention schedule by project / customer
9. Long-term contract look-back interest (US)
10. Subcontractor employment status assessments
11. Reviewer questions — [T2]/[T3] items

## Section 8 — Self-checks

- [ ] Long-term contracts on PCM input cost-to-cost
- [ ] Uninstalled materials excluded from cost-to-cost
- [ ] Small contractor exception applied where eligible (US)
- [ ] CIS subcontractor verification current (UK)
- [ ] CIS return CIS300 filed monthly
- [ ] Domestic reverse charge applied where required (UK)
- [ ] End-user notification documented (UK)
- [ ] New-build zero/reduced rate VAT supported with HMRC notice/EU PVD reference
- [ ] Retention receivable recognised when contractually due
- [ ] Look-back interest computed at contract completion (US)
- [ ] Subcontractor employment status documented (IR35 / §530 / Davis-Bacon)
- [ ] Output flags every [T2]/[T3] item for reviewer judgement

## Section 9 — Disclaimer

Construction sector taxation is highly fact-specific. Outputs must be reviewed by credentialed construction sector practitioners. The most up-to-date version is at [openaccountants.com](https://openaccountants.com).

> Contributed by Ryan Duguid.

## Today's figures and who stands behind this skill

This file is an AI skill (tax rules your AI follows) from OpenAccountants, copied on 2026-10-23. Rates, thresholds and deadlines change. For the current version of this skill, its official sources and the named accountant (if any) who stands behind it, call `get_skill` with slug `construction-sector` on the OpenAccountants connector (https://www.openaccountants.com/connect), or read https://www.openaccountants.com/skills/construction-sector. If neither is available, confirm every figure against the official source pages cited above before relying on it.