When a Main Contractor Fails: Protecting a Subcontractor Client’s Position

Introduction

The call usually comes on a Monday. A groundworks client has heard from the site manager that the main contractor has gone into administration over the weekend. The gates are locked, there is £86,000 of certified work unpaid, another £40,000 of work since the last valuation, £31,000 of retention, and a skip full of materials nobody has paid for.

The client wants to know three things. Can they get paid, should they keep working, and what does this do to their own accounts and tax? The honest answers depend on documents most subcontractors only start looking for after the gates close.

This is not a rare event. Construction recorded 3,866 company insolvencies in the 12 months to August 2026 in England and Wales, 17% of all cases, more than any other industry. And autumn, when cash runs short ahead of winter, is when many of those calls arrive.

This guide is for UK accountancy practices with subcontractor clients, and for subcontractors who want calm, sequenced steps. It covers the first 48 hours, what is recoverable, whether retention is protected, provisioning and write-off timing, VAT bad debt relief, tax relief, and how to reduce exposure on the next job.

It is not legal advice. Insolvency and contract law decide much of what happens here, and an insolvency lawyer or the client’s own solicitor should be involved early where the sums matter.

The first 48 hours

The first two days decide how much evidence the subcontractor will have, and evidence decides how much is eventually recovered. Work through these steps in order.

1. Confirm the procedure and the office-holder. Check Companies House and The Gazette for whether it is administration, liquidation or something else, and who the administrator or liquidator is. Every later step goes through them.

2. Do not simply walk off site. Since 2020, section 233B of the Insolvency Act 1986 generally stops a supplier terminating, or demanding arrears as a condition of carrying on, just because the customer has entered an insolvency procedure. Take legal advice before stopping, and agree in writing how any further work will be paid for.

3. Record the site position. Photograph and list completed work, work since the last valuation, unfixed materials and the client’s own plant and tools. Do not remove goods without the office-holder’s agreement, because administration brings a moratorium.

4. Gather the paperwork. The subcontract, every application, payment notice and pay less notice, invoices, variations, the retention schedule, correspondence, and the CIS payment and deduction statements.

5. Quantify the exposure. Split it into certified but unpaid, applied but not certified, work since the last application, retention, materials, and costs caused by the failure. Note any back-charges the contractor has raised, because they will be set off.

6. Write to the office-holder. Submit the claim, assert any retention of title over materials in writing, and ask whether the office-holder wants work to continue and on what terms.

7. Protect the client’s own cash. Build a 13-week cash forecast, speak to the bank early, and if HMRC liabilities will be missed, ask for Time to Pay before the due date rather than after it.

8. Set up the accounting. Tag the debtor, stop routine credit chasing, start the provision working, and diary the date six months after the due date for VAT bad debt relief.

The instinct is to fire off an adjudication or a winding-up threat. Against an insolvent contractor, neither usually helps, and both cost money that will not come back.

Establishing what is recoverable

Most of what a subcontractor is owed becomes an unsecured claim in the insolvency. The job now is to separate the parts that might come back in full from the parts that will share in whatever dividend is eventually paid.

Item	Where it usually stands	What to do
Certified and invoiced, unpaid	Unsecured debt in the insolvency	Prove for it, and provide for it in the accounts
Applied for but not certified or paid	Open to challenge and set-off	Prove with the valuation evidence and expect questions
Work done since the last application	Unbilled and the hardest to evidence	Measure and record it now, then include it in the claim
Retention, both halves	Unsecured unless held in a valid trust or project bank account	Check the contract and whether a separate account exists
Unfixed materials on site	Depends on retention of title and whether they were paid for	Write to the office-holder; do not remove them without consent
The client’s own plant and tools	Still the client’s, but site access is controlled	List them and arrange collection with the office-holder
CIS deductions already taken	Creditable with evidence	Obtain the statements, or ask the office-holder for them

Set-off and the size of the dividend

The office-holder will net off anything the contractor claims back: defects, delay, contra-charges and the cost of completing the subcontract works. The subcontractor’s claim is the net balance, so a well-documented final account matters more than the headline figure.

What is left ranks behind secured lenders and preferential creditors. Since December 2020, HMRC ranks as a secondary preferential creditor for VAT, PAYE, employee National Insurance and CIS deductions the contractor held, which shrinks what reaches unsecured creditors. Dividends are often a few pence in the pound, and they can take a year or more.

Adjudication and direct payment

Adjudicating against a company in administration needs the administrator’s consent or the court’s permission. Against a company in liquidation it is possible after Bresco v Lonsdale, but a decision is rarely worth enforcing, so proving in the insolvency is usually the better route.

Employers sometimes offer to pay subcontractors directly to keep a job moving. A fresh contract with the employer for future work is clean; payments for work done before the insolvency can be challenged, so take advice before relying on them.

Retention and whether it is protected

Retention is often the largest single loss in an upstream insolvency, because it has built up across several jobs and is the last money due. Whether any of it survives depends on how the contract treats it and on what actually happened to the cash.

The default: an unsecured debt

Unless the contract says otherwise, retention is simply money the contractor owes. When the contractor fails, it joins the rest of the unsecured claim, and both halves, the one due at practical completion and the one due after the defects period, are at risk.

When a trust helps, and when it does not

Some standard forms, including JCT subcontracts, say the contractor holds retention as trustee for the subcontractor. That trust only protects the money if it was actually set aside in a separate account before the insolvency. Courts have refused to order the ring-fencing after the event, because that would turn an unsecured creditor into a secured one.

Project bank accounts set up under a trust deed do protect the money in them, which is why they matter on public sector work. A retention bond, by contrast, protects the employer, not the subcontractor.

The retention ban is coming, but not yet

On 24 March 2026 the government confirmed it will ban cash retentions in construction contracts, alongside a 60-day cap on payment terms and mandatory late payment interest. The Small Business Protections (Late Payments) Bill was introduced in the House of Lords in May 2026, adding the ban to the Construction Act with a two-year transition period.

Until it is law and that transition has run, existing retentions stay lawful and unprotected. Good construction retention accounting UK practice therefore still matters: a schedule of every retention by contractor, job, amount and release date, reviewed monthly, so the exposure to any one contractor is never a surprise.

Provisioning and write-off timing

An insolvency is the clearest evidence of impairment there is. The accounting question is not whether to provide, but how much, and in which period.

How much to provide

Under FRS 102, the debt is written down to what the subcontractor actually expects to receive. The office-holder’s proposals or statement of affairs usually give an early view of the likely dividend to unsecured creditors, and it is often nil or a few pence in the pound.

In practice that means a full or near-full provision against the certified debt, the retention and the work since the last application, with the basis documented on the file. If the office-holder is likely to counterclaim for defects or delay, consider whether that creates a further liability or a disclosure.

Work done but not yet invoiced needs the same treatment. For accounting periods beginning on or after 1 January 2026, FRS 102’s revised revenue section applies, and a later collapse in the customer’s credit is dealt with by impairing the contract asset or receivable, not by reversing revenue already earned.

Which period it belongs to

If the contractor failed before the year end, the provision belongs in that year. If it failed after the year end but before the accounts were approved, FRS 102 treats the insolvency of a customer as an event that usually confirms the loss already existed at the balance sheet date, so the provision still goes into the year being reported.

Provision now, write-off later

Keep the provision until the office-holder confirms there will be no further dividend, then write the debt off. Any dividend received in the meantime reduces the provision, and the VAT relief claimed on that part must be repaid.

A large loss usually deserves its own line or note, so a lender reading the accounts can see the business was profitable before the contractor’s failure. And where the loss threatens the subcontractor’s own solvency, the going concern assessment needs a forecast behind it, which is where construction management accounts UK practices produce monthly earn their keep.

VAT bad debt relief

VAT bad debt relief returns output VAT a subcontractor paid over on an invoice that was never paid. In construction, the first job is checking whether any VAT was paid over at all, because often it was not.

The reverse charge trap

Since 1 March 2021, most supplies between VAT-registered businesses within CIS fall under the domestic reverse charge. The subcontractor charges no VAT and the contractor accounts for it, so on reverse charge invoices there is no output VAT to recover and no bad debt relief to claim.

Relief is only relevant where VAT was actually charged: work for end users or intermediaries who notified their status, supplies outside CIS, or invoices where the reverse charge did not apply. Sort the unpaid invoices into those two groups before anyone calculates anything.

Applications are not invoices

For stage payments on construction contracts, the tax point is the earlier of payment and the issue of a VAT invoice. An application for payment is not a VAT invoice, so where the subcontractor only issued applications and was never paid, no output VAT has fallen due on those amounts.

That is one reason the authenticated receipts approach is common in construction. Check which method the client used before assuming VAT has been paid on the unpaid balance.

Claiming the relief

Where VAT was charged and paid over, relief is available once the debt is six months old, measured from the later of the due date and the date of supply. The debt must be written off in a refunds-for-bad-debts account, the claim goes in Box 4, and it must be made within four years and six months.

The insolvency does not shorten the six months, and there is no need to wait for the final dividend. If a dividend arrives later, repay the matching share of the relief.

The input tax rule that catches the subcontractor

The same six-month rule works in reverse. If the subcontractor, short of cash after the contractor’s failure, cannot pay its own suppliers, any input VAT it claimed on purchases still unpaid six months after the due date must be repaid. Build that into the cash forecast, because it lands exactly when the business is weakest.

Corporation tax relief and CIS credits

The tax relief for a bad debt follows the accounts, which is why getting the provision right matters twice. How it works depends on whether the subcontractor is a company or a sole trader, and on which basis the books are kept.

Limited company subcontractors

A company that recognises a specific impairment of a trade debt under FRS 102 normally gets a deduction in the same accounting period. A general provision, not tied to particular debts and evidence, does not qualify.

If the write-off turns a profitable year into a trading loss, the loss can be set against profits of the same period and carried back against the previous 12 months, often producing a repayment when cash is tight. Any loss left over is carried forward.

Sole traders and partnerships

An unincorporated subcontractor on the accruals basis gets a deduction for debts that are bad or estimated to be bad, on the same evidence. A loss can be set against other income of the same or previous tax year, subject to the cap on certain reliefs.

On the cash basis, now the default for sole traders, income is taxed only when received. The unpaid invoices were never taxed, so there is nothing to deduct, and claiming one would double count the relief.

CIS credits on the payments that were made

Deductions the contractor made from earlier payments are still credits for the subcontractor, provided they can be evidenced. Payment and deduction statements are the evidence, and a failing contractor is exactly the one that stops issuing them, so ask the office-holder for any missing statements and keep the bank records.

A limited company subcontractor offsets those credits through its monthly Employer Payment Summary, and a sole trader claims them on the tax return. Our walk-through of reconciling CIS statements to the SA100 covers the evidence HMRC asks for when the figures do not agree, and our CIS returns team handles the monthly side.

Reducing exposure on the next job

No subcontractor can avoid every failing contractor, but most can limit how much any one failure costs. The measures below cost little and are easiest to put in place while relationships are good.

• Check before signing, and again during the job. Late accounts at Companies House, county court judgments, falling credit scores and slipping payment times are early signals. Large companies publish their payment performance on GOV.UK, and the gap between agreed and actual payment days is telling.

• Set a concentration limit. Decide what share of turnover, and of retention, the business will carry with any single contractor, and report it every month.

• Use the Construction Act properly. Issue applications on time, challenge late or missing payment notices, and use the statutory right to suspend for non-payment, after the required notice, before arrears grow.

• Negotiate the retention terms. Push for a lower percentage, a firm release date, a cap, or a retention bond instead of cash, and where retention is held on trust, ask for it to be placed in a separate account.

• Invoice and chase on the day. A business that invoices weekly and chases at day one of overdue has less at risk on the day a contractor fails.

• Keep a live final account. Variations, delays and daywork agreed in writing as the job goes make the eventual claim, and any set-off argument, far stronger.

• Consider credit insurance for the largest relationships, priced against the margin it protects.

The common thread is monthly visibility. A debtor and retention schedule by contractor, reviewed with the management accounts, turns a Monday morning shock into a known risk with a number attached. That is the routine we build into outsourced construction accounting UK practices hand to us, alongside the job costing that construction project accounting UK clients need to price the risk in the first place.

Frequently asked questions

What happens to money owed to a subcontractor when the main contractor goes into administration?

It usually becomes an unsecured claim. The subcontractor submits a proof of debt to the administrator, the claim is reduced by any valid set-off, and any dividend is paid after secured and preferential creditors, often months later and at a few pence in the pound.

Can a subcontractor stop work if the main contractor is insolvent?

Not automatically. Since 2020, insolvency law generally prevents a supplier terminating, or insisting on arrears being paid, just because the customer has entered an insolvency procedure. The subcontractor can ask the office-holder to agree termination and should insist on payment for any work done after the insolvency, but legal advice comes first.

Is retention money protected if the main contractor goes bust?

Usually not. Retention is an unsecured debt unless the contract makes it trust money and it was actually held in a separate account, or it sits in a project bank account set up as a trust. The planned ban on cash retentions is not yet in force.

Can a subcontractor reclaim VAT on an invoice an insolvent contractor never paid?

Only if VAT was charged and paid over. Most subcontractor invoices to VAT-registered contractors fall under the domestic reverse charge, so there is no VAT to reclaim. Where VAT was charged, relief is available once the debt is six months overdue and written off in the VAT records.

When should a subcontractor write off a debt from an insolvent contractor?

Provide for it as soon as the insolvency is known, at the amount not expected to be recovered, and write it off when the office-holder confirms no further dividend. If the contractor failed after the year end but before the accounts were signed, the provision usually belongs in the year being reported.

Is a bad debt from an insolvent contractor tax deductible?

Yes, where income was taxed on the accruals basis and the loss is a specific impairment supported by evidence. A sole trader on the cash basis was never taxed on the unpaid invoices, so there is no deduction to claim.

Can a subcontractor go to adjudication against an insolvent contractor?

Against a company in administration, only with the administrator’s consent or the court’s permission. Against a company in liquidation it is possible, but a decision is rarely worth enforcing, so proving in the insolvency is usually more sensible.

What does a proof of debt need to include?

The amount claimed, how it is made up and the documents supporting it: the subcontract, applications, payment notices, invoices, variations and the retention schedule. Show any set-off you accept, submit it to the office-holder, and keep a copy with the date sent.

Will a subcontractor still get credit for CIS deducted by a contractor that has failed?

Generally yes, for deductions the subcontractor can evidence, usually with payment and deduction statements. Ask the office-holder for any statements not issued, and keep bank records showing the net amounts received.

Can the employer pay the subcontractor directly?

Sometimes, especially to keep a project moving. A new contract with the employer for future work is the cleanest route; payments for work done before the insolvency can be challenged, so take advice first.

Does a pay-when-paid clause apply here?

Pay-when-paid clauses are generally ineffective under the Construction Act, except where the paying party’s own payer is insolvent. If the employer fails, a main contractor may rely on such a clause against its subcontractors, so check the subcontract wording.

How can a subcontractor reduce the risk next time?

Credit-check contractors before and during jobs, cap exposure to any one of them, negotiate retention terms, use statutory payment and suspension rights promptly, and review a debtor and retention schedule every month.

What is happening to cash retentions in construction?

The government announced in March 2026 that it will ban cash retentions in construction contracts, and the Small Business Protections (Late Payments) Bill was introduced in May 2026 with a proposed two-year transition. Until it becomes law and the transition ends, retentions remain lawful.

Keeping a subcontractor steady when the contractor is not

When a main contractor fails, the subcontractor’s accountant becomes the person who has to turn a locked site into numbers: what is owed, what is lost, what VAT and tax relief applies, and whether the business can carry on. The faster that picture exists, the better the decisions that follow.

We work as the back office for UK accountancy practices with construction portfolios, delivering construction accounting services UK practices can put their name to. That means monthly bookkeeping with debtor and retention schedules by contractor, CIS returns and statement reconciliations, VAT returns that separate reverse charge and standard-rated work, and management accounts with a 13-week cash forecast when it matters most.

When a contractor fails, we can rebuild the exposure schedule, prepare the provision and bad debt relief workings, and draft the figures for the proof of debt, ready for your review. Standard jobs come back within five working days.

If you would rather test it than take our word for it, send us one real subcontractor file, ideally the one with the contractor who has just gone under. We will quantify the exposure, sort the VAT position and hand back a pack your reviewer can sign.

Start a free trial or talk to our construction team.

Related reading: Construction accounting outsourcing for UK practices | CIS tax return services | CIS statements and the SA100

This article is general guidance for UK accountancy practices and subcontractors and is not legal advice or a substitute for advice on a specific client file. Insolvency law, the proposed retention ban and HMRC rules are as at October 2026 and may change.