Construction accounting software (UK): what it does, what to check before you pay and whether you need it

You've got 3 subbies to pay, a retention you're still waiting on and a VAT return due. Your bookkeeping app shows a bank balance, but not which job made money.

Construction accounting software is accounts software that also handles the money rules of building work. That means job costs, CIS, the VAT reverse charge, retention and stage payments.

You may not need a separate product. Many small firms can manage with an ordinary accounts package, as long as it handles the jobs below. Check those before you pay for anything.

In short

• Construction accounting software keeps your books and also tracks money by job, not only by month.
• If you pay subbies, it needs to handle CIS: deductions, monthly returns and the records HMRC can ask for.
• If you're VAT-registered and work for other VAT-registered builders, it needs the domestic reverse charge.
• It must work with Making Tax Digital for VAT, and for Income Tax if you're a sole trader over the threshold.
• A sole trader with no subbies can often manage with a normal accounts app.

What is construction accounting software?

Construction accounting software is software that keeps a building firm's books and handles the money rules that only apply to construction. It records income and spending like any accounts package, then adds the construction parts.

Those construction parts are usually:

• Job costing. Every cost and every invoice is tagged to a job, so you can see each job's profit.
• CIS. The Construction Industry Scheme, where a contractor takes tax off a subbie's pay and passes it to HMRC.
• The VAT reverse charge. A VAT rule where the customer, not you, accounts for the VAT on some building work.
• Retention. Money the customer holds back from each payment until the job is finished or the defects are put right.
• Stage payments. Being paid in instalments as the work goes on, often through an application for payment.

Some products are built for construction. Others are general accounts packages, such as Xero, QuickBooks or Sage. The label matters less than whether your plan does the jobs on your list.

What does a building firm need it to handle?

A building firm needs software that handles the rules it actually meets. A roofer working for homeowners has a shorter list than a groundworks firm with 6 subbies on a main contract.

Go down the first column. Every "yes" is a line your software has to cope with.

Does construction accounting software need to handle CIS?

Yes, if you pay subbies or work as one. CIS has deadlines every month and records HMRC can ask to see at any time.

As a contractor, you must:

1. Take the right deduction: 20 per cent for registered subbies, 30 per cent for unregistered, 0 with gross payment status.
2. Work it out on the labour, not the whole invoice. Take off VAT, materials the subbie paid for, plant hire and some other costs first.
3. Give each subbie you take deductions from a payment and deduction statement within 14 days of the end of each tax month.
4. Send HMRC your monthly return by the 19th. For the tax month 6 May to 5 June, it must reach HMRC by 19 June.

The records matter as much as the return. You must keep the gross amount of each subbie's invoice (excluding VAT) and the deductions you made.

Where you made deductions, keep the materials costs they invoiced you too (excluding VAT). Keep them for at least 3 years after the end of the tax year they relate to.

If you can't show those records when HMRC asks, you could be fined up to 3,000 pounds.

Our guide to CIS deductions and how to work them out goes through the rates in full. The free CIS deduction calculator does the sum for you.

A worked example: one month of CIS records

This is a worked example, not a real firm. A small building firm pays 3 subbies in the tax month 6 May to 5 June.

By 19 June, the firm needs 3 statements out and the monthly return in. Software that holds all of this in one place turns that into a check, not an evening's work.

Does it need to handle the VAT reverse charge?

It does if you're VAT-registered and do CIS work for customers who are also VAT-registered. The domestic reverse charge has applied to building and construction services since 1 March 2021.

Under it, you don't charge VAT to your customer. They account for it instead. Your invoice must make clear the reverse charge applies, and show the VAT amount or rate without adding it to the total.

There's an exception. The reverse charge doesn't apply to an end user, the client at the top of the chain. They have to tell you in writing that they are one.

Check that your software can produce a reverse charge invoice and record it correctly in your VAT return. Mixed jobs are where mistakes creep in, so ask your accountant about any you're unsure of.

Does it need to work with Making Tax Digital?

Yes. Making Tax Digital (MTD) is HMRC's rule that you keep records and send returns using compatible software.

For VAT: all VAT-registered businesses should be signed up. You must use compatible software to keep your VAT records and file your VAT returns.

For Income Tax: sole traders and landlords registered for Self Assessment use it once their qualifying income passes the threshold:

HMRC has a finder for compatible software, but it doesn't recommend any product. Look your software up on HMRC's list of software that works with Making Tax Digital for Income Tax before you pay.

How long does the software need to keep your records?

The software, or your own backup, has to keep your records for as long as HMRC says.

For example, take a sole trader's 2022 to 2023 return, filed online by 31 January 2024. Its records must be kept until at least the end of January 2029.

So ask any supplier what happens to your data if you stop paying. If you can't export it, you could lose records you still have to keep.

What should you check before you pay?

Check it handles your jobs, your tax and your way of working, on a free trial, with your own figures. Take this checklist to any demo.

For questions about data protection and contracts, our guide to what to check in admin automation software has a longer list.

Do you need construction accounting software at all?

Not always. If your work is simple, an ordinary accounts package may do everything you need.

Stage payments come up on bigger jobs. Under the Construction Act, you're entitled to be paid in instalments unless the work is set to last less than 45 days.

The Act doesn't cover a job mainly on a home the customer lives in or plans to live in. It covers England, Wales and Scotland. Northern Ireland has its own version, the Construction Contracts (Northern Ireland) Order 1997.

Whatever you choose, your accountant should be happy with it. Ask them before you switch.

Where Nexley fits

Nexley is the AI back office for UK trade firms. Five AI assistants do your office work overnight, from quotes and invoices to tenders and supplier orders, and you approve each one from WhatsApp.

Nexley isn't a new accounts package. It works inside the one you already have. It links to Xero, QuickBooks and Sage, so invoices and payments land in your books without retyping.

Nexley does the day-to-day bookkeeping: receipts coded to the right job and the bank feed matched. It prepares your CIS and VAT from the books, and logs retentions with their release dates.

Your accountant still checks and signs off. See what Nexley's back office software for tradesmen covers, or look at Nexley's pricing.

Common questions

What is the difference between accounting software and construction accounting software?

Accounting software keeps the books for any business: income, spending, VAT and reports. Construction accounting software adds the parts building work needs, such as CIS, the reverse charge, retention and job costing.

A general package may cover some of these on some plans. So compare features, not labels.

Can I use Xero, QuickBooks or Sage for construction?

You can, as long as your plan handles the jobs you need, such as CIS, the reverse charge and job costing.

Check the supplier's own feature list for your plan, and check the product is on HMRC's Making Tax Digital list. Then ask your accountant, since they'll work with it every year.

Do subcontractors need construction accounting software?

Not usually a special one. A subbie needs to record their income and the CIS taken off their pay, then claim it back.

A sole trader claims it through their Self Assessment return. A limited company claims it through its payroll returns to HMRC. Any accounts software that records this, and meets Making Tax Digital if it applies, will do.

Is there free construction accounting software?

There are free options, but with limits. HMRC says free Making Tax Digital products are available for people with simple tax affairs, with limits on how they can be used.

If you pay subbies or work on stage payments, a free tool may not cope. Test it on a real month first.

Sources

This page is general guidance, not tax or accounting advice. Tax rules change, so check gov.uk or ask your accountant about your own situation.

• What you must do as a CIS contractor: make deductions and pay subcontractors (GOV.UK) (gov.uk)
• What you must do as a CIS contractor: file your monthly returns (GOV.UK) (gov.uk)
• What you must do as a CIS contractor: record keeping (GOV.UK) (gov.uk)
• What you must do as a CIS subcontractor: pay tax and claim back deductions (GOV.UK) (gov.uk)
• VAT reverse charge technical guide (GOV.UK) (gov.uk)
• Check if you're eligible for Making Tax Digital for Income Tax (GOV.UK) (gov.uk)
• Find software that's compatible with Making Tax Digital for Income Tax (GOV.UK) (gov.uk)
• Find software that's compatible with Making Tax Digital for VAT (GOV.UK) (gov.uk)
• How long to keep your records if you're self-employed (GOV.UK) (gov.uk)
• Company and accounting records (GOV.UK) (gov.uk)
• Housing Grants, Construction and Regeneration Act 1996, section 109: stage payments (legislation.gov.uk) (legislation.gov.uk)
• Housing Grants, Construction and Regeneration Act 1996, section 106: contracts with a residential occupier (legislation.gov.uk) (legislation.gov.uk)
• Construction Contracts (Northern Ireland) Order 1997 (legislation.gov.uk) (legislation.gov.uk)