Construction Industry Scheme (CIS) for subcontractors in FreeAgent

This article explains how the Construction Industry Scheme (CIS) works in FreeAgent for sole trader and limited company subcontractors. 

If you’re a subcontractor, you need to enable CIS in FreeAgent and then add CIS to your invoices. If you’re also a contractor, find out how to enter CIS transactions into FreeAgent as a contractor.

1. Enable CIS

Select 'Settings' from the drop-down menu in the top-right corner and then select 'Construction Industry Scheme'.

Select ‘Enable CIS support’.

Not running payroll in FreeAgent

If you have a limited company account type and you won’t be running payroll in FreeAgent, select ‘No’ to ‘Will you submit RTI payroll in FreeAgent?’. You can then skip to selecting the available deduction rates.

Running payroll in FreeAgent

If you have a limited company FreeAgent account type and will be running payroll in FreeAgent, select ‘Yes’ and select the tax year you’d like to begin from using the drop-down menus.

Please note that to claim CIS through your payroll, you’ll need to enter your Corporation Tax reference number in your business's details.

Initial CIS balance

If you choose to run payroll in FreeAgent, you may need to enter your CIS activity prior to enabling CIS in FreeAgent.

Enter the total value of CIS deductions that you’ve incurred since your chosen starting tax year. Make sure this figure is correct as it will be filed to HMRC if you’re making RTI submissions.

Please note that if you choose to enter an initial CIS balance and you haven’t created those invoices in FreeAgent, then you’ll also have to enter opening balances to have an accurate set of accounts contained within FreeAgent. If you’re unsure which initial CIS balance to enter or which opening balances are required, please ask your accountant.

CIS deduction rates

Finally, choose the CIS deduction rates you’d like to use on your invoices and select ‘Enable CIS support’ to complete the process. 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. You can come back and select them again later if you need to.

If you’re unsure which rates you require, please see the information on HMRC’s website.

2. Add CIS to your invoices

Once you’ve enabled CIS, you’ll have the option to select a ‘CIS Category’ when you create an invoice in FreeAgent.

Once this category has been selected, you can add CIS to the invoice line items using the ‘Income Category’ drop-down menu.

If you need to operate the CIS reverse charge on your invoices, please read this guidance first.

To add non-CIS line items to the same invoice, select ‘Create and add another’ and make sure to select a non-CIS ‘Income Category’. FreeAgent will only apply a CIS deduction to the relevant line item(s).

You can view your CIS deduction total at the bottom of the invoice, where it will have been automatically deducted from the invoice total.

When the payments for the invoices import into FreeAgent via a bank feed or bank statement upload, explain them as ‘Invoice Receipts’ and allocate them to the relevant invoices to mark them as paid.

If you’re also a contractor, find out how to enter CIS transactions into FreeAgent as a contractor.

How CIS deductions work in FreeAgent

FreeAgent will automatically recognise the CIS deductions you've incurred when you explain payments you've received against your CIS invoices. The way these are handled depend on whether you're running payroll or not running payroll in FreeAgent.

How CIS is offset monthly when you run payroll

If you have a limited company and you run payroll in FreeAgent, the CIS deductions will be offset against payroll liabilities where the CIS deduction takes place in the same tax year as the payroll (PAYE) liability.

It’s important to note that the CIS offset is calculated at the point the payroll is prepared, so if any CIS invoices were marked as paid after preparing the payroll, you’ll need to force a recalculation of the CIS offset by deleting and then preparing the payroll again. This will pull through any CIS deductions from invoices not previously included. Alternatively, the deductions will be included on next month’s payroll.

To see the offset in FreeAgent, go to the Trial Balance, choose a custom date range and enter a start date of 6th April and a finish date of the day the payroll was run. You’ll see the relevant deductions and liabilities in the ‘812 - CIS Deductions’ category and ‘814 - PAYE/NI’ category respectively.

If the ‘812 - CIS Deductions’ category has a debit balance and the ‘814 - PAYE/NI’ category has a credit balance, an offset will take place. The size of the offset will depend on the balances. The offset won’t take the ‘812 - CIS Deductions’ category into credit or the ‘814 - PAYE/NI’ category into debit. Therefore, the value of the offset will be the lower of the balances of the two categories, as at the day you prepared the payroll. The offset is purely an accounting adjustment and does not affect how much is reported to HMRC as CIS deductions.

The full value of CIS Deductions Suffered will be reported in the RTI submission made to HMRC, whereas the amount of CIS offset in a specific month will be included in the Payroll Summary report.

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 not run your payroll until after the date you receive your final CIS payment.

If you've still got CIS deductions outstanding over and above the amount of PAYE/NI at the end of the tax year, you can apply for a refund with HMRC or ask them to set 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.

Not running payroll

If you’re a sole trader or not running payroll, the CIS deductions will accumulate in the ‘812 - CIS Deductions’ category which you can view 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’ category in the tax year you're completing your Self Assessment for. Enter this value in box 38 if you complete short version of the Self-employment pages or box 81 if you complete long version of the Self-employment pages.

To ensure the balance in the 'CIS Deductions' category is correct each tax year, you need to return the balance in this account to zero for the start of the new tax year. You can do this by creating the following journal entries:

• Credit ‘812 - CIS Deductions’ for the amount accumulated in the CIS deductions category.
  
  
• Debit ‘901 - Capital Account’ for the amount accumulated in the CIS deductions category.

If you're unsure which journal entries are required, please ask your accountant.