Public Sector Contracts: What Gets Deducted and When It Comes Back

Anyone who has invoiced a ministry, a municipality or a state-owned company knows the pattern: the amount that lands in the bank never matches the progress certificate. This note is for contractors and finance managers who want the basis of each deduction, which ones come back, and which are gone for good.

From certificate to bank account

Every payment passes through several filters. Gross work value is certified, price-variation clauses are applied, statutory and contractual deductions come off, and VAT is added on top. What remains is what the employer transfers.

The split that matters is between deductions that are a cost and deductions that are an asset temporarily sitting with the employer. Mixing the two is the most common error I see in contracting files, and it leaves the contractor unsure how much they are owed. The correct treatment is set out in contracting accounting.

The usual deductions

The percentages above are revised in social security revenue circulars and planning organisation guidance. Take the contract text and the latest circular as your source, and update the figures in your accounting system rather than reusing last year's.

Social security: the heaviest line

Article 38 of the Social Security Act obliges the employer to claim the contractor's social security contribution and to hold back five percent of the contract value and the final instalment until the clearance certificate is produced. The coefficient applied depends on the nature of the contract: work that includes materials attracts a materially lower rate than labour-only work.

The single biggest source of dispute is classification. If the contract does not state clearly that materials are the contractor's responsibility, the organisation can treat the whole thing as labour-only and apply the higher coefficient. On a mid-sized contract the difference between the two treatments can absorb the entire project margin. Calculation and appeal routes are covered in social security on contracting work and the clearance certificate.

Retention and advances

Retention is withheld from each certificate and released in two stages. Many contracts allow it to be substituted with a bank guarantee — if the cost of the guarantee is below your cost of capital, that swap is worth negotiating.

The advance payment is different in kind: it is a liability, not revenue. It is released against a guarantee and amortised out of subsequent certificates. Recording it as income in the year of receipt distorts the accounts and creates tax before there is any profit to tax.

VAT on public contracts

VAT forms part of the price and must be charged on the certificate. The classic difficulty is that the authority, short of budget allocation, settles that portion months or years later while your periodic filing deadline arrives on schedule. Three practical measures:

1. Make VAT payment a separate clause with its own timeline in the contract.
2. Present the VAT amount as a distinct, traceable line on every certificate.
3. Keep the correspondence demanding payment; it clarifies your position when the VAT file is reviewed.

Keep the VAT line reconciled to your periodic returns so the receivable is visible.

What remains of contract withholding

General withholding on service contracts, applied for years under Article 104, no longer operates, yet its language survives in many public contracts. If your contract contains a tax deduction clause, put two questions in writing: what is the legal basis, and will a withholding certificate be issued. Without the certificate, the amount will not be accepted as a prepayment in your annual return and you effectively pay twice. Without that certificate the payment is simply a reduction in your price.

Seven checks before signing

1. Define the materials position explicitly in the contract text.
2. Ask the employer for a table of every deduction, its percentage and its legal basis.
3. Put the timing and conditions for releasing retention in writing.
4. Add a dated, standalone clause for VAT payment.
5. Negotiate the option to replace retention with a bank guarantee.
6. Fix the price adjustment mechanism for contracts running over a year.
7. Name who issues the withholding certificate and by when.

Tax on revenue you have not collected

Public contracting recognises revenue on the certified progress certificate, not on collection. You can therefore owe income tax for a year in which the cash is still sitting with the employer. That gap is the defining risk of the business and requires deliberate cash discipline — see cash flow and working capital management.

Two statutory routes ease the pressure. Confirmed tax debt can be paid in instalments under Article 167. Confirmed receivables from public bodies can, under provisions repeated in successive annual budget laws, be offset against tax debt. Both require clean documentation and neither works quickly.

Key takeaways

• Separate cost deductions from asset deductions in your ledgers, or you will not know what you are owed.
• The materials classification drives your social security coefficient and often your entire margin.
• The five percent hold is released only against the social security clearance, so keep the insurance file clean from day one.
• Charge VAT as a separate line and archive every request for payment.
• Contracting revenue is taxed when certified, not when collected; plan the cash for that gap.