This article explains how the Construction Industry Scheme (CIS) works in FreeAgent for sole trader and limited company subcontractors.
Please note that FreeAgent's CIS functionality won't be available if you have an unincorporated landlord account.
How to enable CIS
Please note you’ll need to have a user access level of 8 to continue.
1. Navigate to CIS Settings
Select 'Settings' from the drop-down menu in the top-right corner and then select 'Construction Industry Scheme'.
2. Select ‘Enable CIS support’
3. RTI payroll
Next, FreeAgent will ask if you are making submissions via RTI payroll. You will only be asked to complete this section if your business is a UK limited company, and you haven't already run payroll.
If you don’t submit RTI payroll
If you don’t submit RTI payroll, then select ‘No’ in answer to the question ‘Will you submit RTI payroll in FreeAgent?’ and select ‘Enable CIS support’. Your CIS functionality is now live.
If you do submit RTI payroll
If you do submit RTI payroll, then select ‘Yes’ in answer to the question ‘Will you submit RTI payroll in FreeAgent?’ and select the tax year you’d like to begin from within the drop-down for ‘Starting Tax Year’. For most users, this will be the current tax year.
Please note that to claim CIS through your payroll, you’ll need to enter your Corporation Tax reference number in your ‘Company Details’.
4. Initial CIS balance
You have two options when it comes to letting FreeAgent know about your CIS activity prior to enabling our CIS functionality:
Option 1: enter an initial CIS balance
The initial CIS balance that you enter should be the total value of CIS deductions that you’ve incurred since your chosen starting tax year. If you plan to create CIS invoices for past work, as detailed below, then leave this field blank. Make sure this figure is correct, as it will be filed to HMRC if you’re making RTI submissions. Please be aware that if you choose to enter an initial CIS balance, and you haven’t created those invoices in FreeAgent then you will also have to enter opening balances to have an accurate set of accounts contained within FreeAgent. This can be a little tricky, so you might need a little help from your accountant, if you have one.
Option 2: create CIS invoices for your selected tax year
If you don't enter an initial CIS balance, you must now record all your CIS invoices for the tax year you've selected in FreeAgent. For some users, this will be an easier way of transferring to FreeAgent's CIS functionality, as you don't have to enter any opening balances. Please note that these invoices are not to be sent out, just to be marked as sent. They are solely for the purpose of recording the data in FreeAgent. You will also have to add a manual bank account entry, to let FreeAgent know that these historical invoices have been paid.
5. CIS deduction rates
The final step of setup is to choose the CIS deduction rates you’d like to create. By default, all three rates will be selected.
If you know one or two of these rates won’t apply to you, you can deselect them and they won’t be available when you create your invoices. However, please be aware that once you have created your first invoice, the CIS rates can’t be changed, so you may prefer to leave all three available in case you need them later.
If you’re unsure which rates you require, take a look at the information on HMRC’s website.
How to add CIS to an invoice
Creating a CIS invoice in FreeAgent is almost exactly the same as creating a standard invoice, with a couple of small differences.
Navigate to ‘Work’, then select ‘Invoices’ from the menu below. Next, select, 'Add new invoice'. If CIS has been enabled on your account successfully, then you will see a ‘CIS Category’ option under ‘Invoice Details’. If you’re already enrolled in the CIS scheme, you should know which category to select here. If you’re not sure, find out more on HMRC’s website. Once this category has been selected, you are now able to add CIS line items.
How to add CIS line items to an invoice
If you need to operate the CIS reverse charge on your invoices, please read this guidance first.
Adding CIS line items to an invoice is very similar to adding regular items to an invoice. The only difference is that you should select the appropriate CIS income option from the ‘Income Category’ drop-down.
You can still add non-CIS line items to the same invoice. Just select ‘Create and Add Another’ when you’ve finished, but this time make sure to select a different ‘Income Category’. As you can see below, FreeAgent only applies a CIS deduction to the relevant line item(s).
You can view your CIS deduction total at the bottom of the invoice, which has been automatically deducted from the invoice total.
Final payroll of the year
Note: this only applies to UK limited companies. Sole traders can file their Self Assessment tax return in FreeAgent as usual.
When you come to run the final payroll of your tax year, if you think you'll receive CIS invoice payments after the normal day you run payroll, and you want to include them in your final submission, you should change the date you run payroll to be after the date you receive your final CIS payment.
If you've still got un-offset CIS deductions at the end of the tax year, you can apply for a refund with HMRC or ask them to offset these deductions against your corporation tax bill. You'll have to contact HMRC directly to make arrangements for this if it applies. Once you have agreed the method by which you’ll receive these deductions back, your accountant should be able to help you reflect that in your accounts.
How CIS deductions work in FreeAgent
CIS Deductions account
FreeAgent will automatically recognise the CIS deductions you've incurred when you explain payments you've received against your CIS invoices. These deductions will accumulate in your CIS Deductions account, viewable on your balance sheet.
The balance in this account will represent the accumulated total of CIS deductions you've incurred, but haven't yet offset against other taxes you owe.
If you’re a sole trader, when you do your Self Assessment you can use the balance that's accumulated in this CIS Deductions account in the tax year you're completing your Self Assessment for. You'll simply need to enter this value in box 38 if you complete short self employment pages or box 81 if you complete long self employment pages. Your tax bill will be reduced by the value you enter in this box; you may even be due a refund if you've incurred more CIS deductions than your overall tax bill.
To ensure the balance in the 'CIS Deductions' accounts is correct each tax year, you need to return the balance in this account to zero at the start of the new tax year. You can do this by creating journal entries to move the amount in the 'CIS Deductions account (812)' to the 'Capital Account (901)'. If you're unsure which journal entries are required, please ask your accountant.
If your business is a limited company, you can offset the CIS deductions you incur against taxes you owe after running payroll. FreeAgent will automatically include the figure you need to submit to HMRC based on your paid and part-paid CIS invoices. FreeAgent will also automatically update your accounts and offset the taxes you owe with the CIS deductions you've incurred, so you'll always know how much to pay to HMRC.