Construction Industry Scheme (CIS) for contractors in FreeAgent

This article explains how to enter Construction Industry Scheme (CIS) bills into FreeAgent if you're a contractor.

If you’re a contractor, you'll receive bills from your subcontractors, but you won't pay the full amount of that bill to the subcontractor as part of it will be paid to HMRC. Therefore, you’ll need to follow the steps below to:

1. Set up CIS
2. Add a CIS subcontractor contact
3. Add the subcontractor's bill
4. Pay off the bill
5. File the CIS300 monthly return
6. Send a monthly payment and deduction Statement
7. Pay the CIS tax
8. Offset the CIS and PAYE balances

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

1. Set up CIS

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

Select ‘Set up CIS’.

Select ‘Yes’ to ‘Are you a registered CIS Contractor’ and then select 'Save changes'.

2. Add a CIS subcontractor contact

You'll need to ensure that the subcontractor you want to pay is set up as a contact and set to a CIS subcontractor. This can be done either by adding them as a contact or by editing an existing contact and selecting ‘Yes’ to ‘Is this contact a CIS subcontractor.

Your subcontractor will present you with bills which you need to enter in FreeAgent. Make sure that the subcontractor has their CIS deduction rate set to the appropriate rate as detailed on the bills they present to you.

Then, enter their Unique Taxpayer Reference (UTR) and verification number. HMRC states that before you can pay a new subcontractor, you’ll need to verify them. This can be done through HMRC’s website. Once verified, HMRC will determine whether they’re registered for the Construction Industry Scheme (CIS), what rate of deduction to use and provide a verification number.

3. Add the subcontractor's bill

Once you’ve enabled CIS and set your contact as a subcontractor, you’ll have the option to select one of the following CIS categories when you create a bill for that contact. It is important that you use one of the following categories for bill items that relate to CIS and not custom categories, to ensure it is recorded correctly.

• 096 - CIS Accommodation and Meals
• 097 - CIS Travel
• 098 - CIS Labour
• 099 - CIS Materials

Your subcontractor will present you with a bill which you need to enter in FreeAgent as normal, in full. Let's say the bill is for £400 (0% VAT) worth of labour with a 20% CIS deduction so you're going to pay your subcontractor £320 and then pay £80 CIS deduction to HMRC. You will need to ensure that the subcontractor has their CIS deduction rate set to 20%.

When entering the details for the bill, enter £400 in the 'Total Price' field and select 'CIS Labour' from the spending category list.

The bill will then show the CIS deduction total at the bottom, where it will have been automatically deducted from the amount due.

When a bill is added and the CIS contact is later edited to change the deduction rate (e.g. from 20% to 30%), this does not affect any bills that have already been created. Even if the bill is edited and saved, the CIS deduction rate will remain unchanged. If the wrong rate was selected, a new bill must be created.

4. Pay off the bill

When the payment for the bill shows in your FreeAgent bank account, explain it as 'Bill Payment' and allocate it to the relevant bill to mark it as paid.

Once the bill has been paid, FreeAgent will record the CIS deduction, £80 in the example above, as owing to HMRC under the accounting category '811 - CIS Deductions on Expenditure’.

5. File the CIS300 monthly return externally

Please note that FreeAgent doesn't support the monthly CIS300 return, therefore it’ll need to be submitted to HMRC outside of FreeAgent, for example using HMRC's CIS online service. Find out how to complete the return in HMRC’s guidance.

You’ll need to file a CIS300 return to HMRC by the 19th of each month, detailing payments you’ve made to subcontractors, ensuring that the right tax deductions are reported and paid.

FreeAgent will shortly be releasing extra reporting to help you populate your CIS300 return. In the meantime, you can use the Show Transactions report over a custom date range to see the balances in your custom CIS liability and subcontractor cost categories in FreeAgent to help you complete the return.

6. Send a monthly payment and deduction statement

The contractor must provide a written statement to every subcontractor from whom a deduction has been made within 14 days of the end of each tax month. A tax month runs from the sixth of one month to the fifth of the next month and the statement must be provided by the 19th of the month. FreeAgent will soon be introducing the ability to generate and email the payment and deduction statements directly to your subcontractors, simplifying the process for you.

7. Pay the CIS tax

When you pay the CIS tax from your business bank account, you'll need to explain the transaction.

Select 'Payment' from the 'Type' drop-down menu and select 'CIS Deductions on Expenditure' which will appear under the Taxes drop-down heading.

Select 'Explain transaction' to complete the process.

If you run payroll and are registered as a CIS contractor, you may make one payment per month or quarter to cover your PAYE tax, National Insurance, and CIS deductions. If this is the case, you should split the bank payment between categories ‘CIS Deductions on Expenditure’ and ‘PAYE/NI’.

8. Offset CIS and PAYE balances

Subcontractors that are limited companies need to reduce the amount of PAYE, National Insurance contributions, Student Loan repayments, and any CIS deductions that the company is due to pay as a CIS contractor by the amount of CIS deductions incurred as a CIS subcontractor.

If you are a limited company, registered as both a CIS subcontractor and a CIS contractor, and you run payroll in FreeAgent, the CIS deductions incurred as a subcontractor will be automatically offset against your payroll liabilities (PAYE, National Insurance contributions, and Student Loan repayments) when you run payroll for each month. FreeAgent does this by checking 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 of 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.

To ensure that the CIS deductions incurred on your CIS bills are also included in the offset against the CIS deductions incurred as a subcontractor, you will need to make some adjustments to move the CIS charged on bills (‘811 - CIS Deductions on Expenditure’) to ‘814 - PAYE/NI’. You can do this by creating the following journal entries:

• Debit - ‘811 - CIS Deductions on Expenditure’
• Credit - ‘814 - PAYE/NI’

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

Changing from using a dummy bank account to a custom category

If you’ve been using a dummy bank account or custom category to represent the CIS deductions and want to start using the method outlined above, we’d recommend making the switch at a point at the start of a new tax month (6th of the month) so that the dummy bank account or custom category balance is £nil once the balance owed to HMRC for the month has been paid.In other words, once you’ve completed payments for all your current CIS bills for the month and have paid the amount due to HMRC.

Then, when you receive your next bill from a CIS subcontractor, simply follow the steps above to enter the bill and allocate the payments.

Once the dummy bank account shows a zero balance, you can also hide the dummy bank account to avoid confusion. There should be no need to post any journal entries or other amendments, but if you’re not sure about this, please speak to your accountant for help.