Construction Industry Scheme (CIS) for contractors in FreeAgent
This article explains how to enter Construction Industry Scheme (CIS) transactions 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:
- Add the subcontractor's bill
- Create a liability category for the CIS deductions
- Pay off the bill
- File the CIS300 monthly return externally
- Pay the CIS tax
- Offset the CIS and PAYE balances
If you’re also a subcontractor, find out how to enter CIS transactions into FreeAgent as a subcontractor.
Please note:
- FreeAgent doesn't support the monthly CIS300 return. Therefore, it’ll need to be submitted to HMRC outside of FreeAgent.
- If your subcontractor is operating the CIS reverse charge on their bills to you, please read this guidance first.
- You'll need full (level 8) access to your FreeAgent account to create an accounting category.
- If you’ve previously created a dummy bank account to represent the CIS deductions, you can continue to add manual bank transactions in the dummy bank account for the bill payments and explain the payments to your subcontractors as transfers between the dummy bank account and your business account, rather than following the steps below. The PAYE payment to HMRC would be explained in the business bank as type 'Payment' and ‘PAYE/NI’ as the category. A manual transaction would then also need to be added in the dummy bank account as type ‘Refund’ and ‘PAYE/NI’ as the category.
Alternatively, you can follow the steps towards the end of this article to change from using a dummy bank account to a custom liability category.
1. Add the subcontractor's bill
Your subcontractor will present you with a bill which you need to enter in FreeAgent as normal, in full. If the currency is different to your native currency, find out how to add a foreign currency bill.
Let's say the bill is for £400 and you're going to pay your subcontractor £300 and then pay £100 to HMRC.
When entering the details for the bill, enter £400 in the 'Total Price' field.
2. Create a liability category
To track CIS liabilities and payments separately from PAYE and NI liabilities for your employees, create a new custom liability category for CIS. Call this something suitable such as ‘CIS for subcontractors’.
3. Pay off the bill
When you pay your subcontractor, you'll see a payment coming out of your business bank account, £300 in the example above. Please note that you can’t use Payit to pay off your subcontractor’s bill since you are effectively part-paying it.
Split the payment transaction and increase the value to the full value of the bill, £400 in our example, in order to pay off the bill in full.
Select 'Create New Explanation' at the bottom of the screen.
Once you’ve created this explanation, FreeAgent will create another new transaction for the remaining amount, a receipt for the CIS amount of the bill, in this case £100.
Select 'Other Money In' as the transaction 'Type' and select the new custom liability category you created from the 'Category' drop-down menu.
Select 'Explain transaction'.
4. File the CIS300 monthly return externally
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.
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 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.
5. Pay the tax
When you pay the CIS tax from your business bank account, you'll need to explain the transaction.
Select 'Other Money Out' from the 'Type' drop-down menu and select the new custom liability category you created from the 'Category' drop-down menu.
Select 'Explain transaction' to complete the process.
6. Offset CIS and PAYE balances
Finally, if you also submit payroll for employees or are a CIS subcontractor, you might need to make some adjustments to the custom CIS and PAYE/NI categories to return the balance in the categories to zero for the start of the new tax year.
You can do this by creating the following journal entries once you’ve filed the last payroll of the tax year:
- Debit the custom CIS category that you created for the amount accumulated in the account.
- Credit ‘814 - PAYE/NI’ for the amount accumulated in the custom CIS category.
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 to represent the CIS deductions and want to start using the method outlined above, we’d recommend making the switch at a point where the dummy bank account balance is £nil. In other words, once you’ve completed payments for all your current CIS bills.
Then, when you receive your next bill from a CIS subcontractor, simply follow the steps above to enter the bill, create the custom liability category and allocate the payments.
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.