It’s rarely the size of the tax bill that hurts.
It’s realising the money has already been spent.
Most construction business owners don’t find out their corporation tax bill nine months early.
They find out when the year-end is finalised and the accountant sends the email:
"Your corporation tax is £___, payment due on ___."
You stare at the number, not because it's outrageous, but because the first question is:
"Where am I going to find that?"
The truth is simple:
The tax bill didn't catch you out.
The timing did.
For nine months, the money that should have been ring-fenced has been sitting in your main trading account. It has been quietly spent on wages, materials, slow-paying clients, retentions, and unexpected costs.
You didn’t waste the money.
You used it to keep the business moving.
But HMRC doesn't care about the cashflow rollercoaster.
They care about last year's profit, and they want paying now.
This isn't a tax problem.
It's a cashflow behaviour problem.
Why Construction Businesses Drift Into This Trap
Corporation tax feels distant. Nine months feels safe. But construction business cashflow squeezes you long before the deadline hits.
Here are the five structural reasons construction firms struggle to keep tax money untouched:
1. You get paid less than the value of the work you’ve done
Invoice value: £10,000
Cash received after CIS: £8,000
The bank balance never reflects actual profit, making it harder to see what is owed to HMRC.
2. Retentions lock up profit for months (or years)
3 to 5 percent disappears into a retention black hole.
It’s technically your money, but not available when you need it.
3. You pay out before you get paid
Materials upfront.
Labour weekly.
Fuel constantly.
Overheads monthly.
Client payments delayed.
Your cash goes out weeks before money comes back in.
4. Payment terms stretch further than agreed
30 becomes 45.
45 becomes 60.
60 becomes "we’re chasing the QS".
Even profitable firms run tight cash positions.
5. Jobs never run in a straight line
A busy month can hide a slow one.
A profitable job can hide a delayed invoice.
One big retention can change the whole quarter.
This volatility means the largest pot of money is always the easiest pot to use:
the tax money.
Not out of negligence.
Out of survival.
A Real Story (Anonymous, But Familiar)
A client of mine - let's call him J - ran a strong business. Good margins, good demand, solid commercial clients.
But everything sat in one bank account.
When his year-end was completed, his corporation tax was just over £30,000. There wasn’t anger. Just confusion:
"How do I owe thirty grand when there’s nothing like that in the account?"
We reviewed the previous nine months:
Nothing reckless.
All sensible decisions.
But together, they slowly consumed the tax pot.
The outcome?
The financial cost: a few hundred in interest.
The mental cost: months of stress and lost confidence.
This wasn't bad management.
This was the consequence of mixing tax money with operational cash.
The Hidden Cost of Using Tax Money to Keep the Business Running
Using tax money feels harmless:
"I'll put it back next month."
"I just need it for this job."
"I've got nine months."
But when you borrow from future obligations, you’re effectively financing the business at the worst interest rate imaginable.
Example:
You have four months to rebuild £30K while still:
All it takes is one unpredictable event and the pot never gets rebuilt.
Most owners don't end up with penalties.
They end up with:
The real cost is not the tax payment.
It’s the uncertainty of not knowing how much money is truly available.
Why This Keeps Happening
Construction cashflow never gets easier next month.
Because:
You're using next year's cashflow to pay last year’s tax, and if this year is slower, you’re in trouble even if last year was strong.
This mismatch is what catches people out.
The Fix: Separate Tax Money From Day One
When VAT and corporation tax sit in the trading account:
When you separate that cash:
This is one of the simplest ways to stabilise a construction business.
A Practical Tax Separation System (Built for Construction Cashflow)
A simple rule works best in construction:
Put aside 2.5% to 5% of your turnover for corporation tax.
Most construction firms land somewhere between 5% and 10% operating profit, so this range keeps you safely ahead without over-stretching cashflow.
Here’s the system:
1. Open a separate “Tax Reserve” account
Starling, Tide, or a second account with your current bank.
The only purpose of this account is to hold tax money - nothing else.
2. Pick your percentage
Simple and predictable.
3. Move the money every time you get paid
Payment comes in?
Transfer 2.5–5% straight to the Tax Reserve.
No waiting for month-end.
No calculating profit.
It moves with your cashflow.
4. Check and adjust quarterly
Look at year-to-date profit and expected tax.
If you're falling short, bump the percentage slightly.
If you're ahead, leave it as is and build a buffer.
5. Treat it as untouchable
If the main account gets tight, you solve the cashflow issue - you don’t dip into the tax pot.
This one habit stops the annual scramble, protects your cashflow, and turns HMRC deadlines into non-events.
This is one of the five accounts I wrote about in Newsletter #019 - the account that pays for itself in peace of mind.
Final Thought
You didn’t build a business to lie awake worrying about tax deadlines.
Separate the money early, protect your cashflow, and give yourself peace of mind.
The goal isn't to pay more tax.
It's to pay it from a position of strength.
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