How to record Construction Industry Scheme (CIS) transactions as a contractor

This article explains how to enter Construction Industry Scheme (CIS) transactions into FreeAgent 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. For more information about the CIS, please see the following HMRC guidance.

If your subcontractor is operating the CIS reverse charge on their bills to you, please read this guidance first.

Please note that FreeAgent doesn't support the CIS300 return. Therefore, if your business operates as both a contractor and a subcontractor for CIS, you won't be able to use FreeAgent's payroll as HMRC requires the payroll to be submitted at the same time as the CIS300 return. 

If you need to file payroll, this will need to be submitted to HMRC outside of FreeAgent.

There are two possible ways to record your transactions. We recommend option 1 if you have only one or two subcontractors, or option 2 if you work with a larger number of subcontractors, so that you can easily track what is owed to whom.

Option 1: custom liability account

1. Create a liability category

If you would like to track CIS liabilities and payments separately from PAYE and NI liabilities for your employees, you can create a new custom liability category for CIS. Call this something suitable such as ‘CIS for subcontractors’. You'll need full (level 8) access to your FreeAgent account to create this new category.

2. 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.

3. Pay off the bill

When you pay your subcontractor, you'll see a payment of £300 coming out of your business bank account. Split this 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.

4. Show the CIS due

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.

If you created a new custom liability category, select 'Other Money In' as the transaction 'Type' and select the new custom liability category you created from the 'Category' drop-down menu. If you didn't create a custom liability category, explain the transaction as a PAYE refund instead.

Select 'Explain Transaction'. This is to show that you owe money to HMRC.

5. Pay the tax

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

If you created a new custom liability category, 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. If you didn't create a custom liability category, explain the transaction as a PAYE payment instead.

Select 'Explain Transaction' to complete the process.

Option 2: dummy bank account

Using a dummy bank account to track CIS bills and payments can help you track what is owed to each different subcontractor.

1. Create a bank account

First, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop down menu.

From the 'Bank Accounts Summary' page, select 'Add new account' and then choose 'Bank Account' from the drop down menu.

Call it something suitable such as "CIS Deductions". It won't have a sort code or account number so you can leave those fields blank.

2. 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.

3. Pay off the bill

When you pay your subcontractor, you'll see a payment of £300 coming out of your business bank account.

Don't explain this as a bill payment. Instead, explain it as a transfer from your business bank account to the CIS bank account.

4. Add a manual bill payment

Navigate to the 'Banking' tab, select 'Bank Accounts' from the drop down menu and choose the CIS bank account from the list of accounts. 

Select 'More' and then 'Add Transaction' to enter a manual bill payment from the CIS bank account for £400, to pay the bill off in full.

This is so that your accounts won't have a permanent unpaid bill sitting in Aged Creditors.

5. Pay the tax

When you pay the CIS tax from your main bank account, explain that as a Payment with type PAYE / NI, because that's how you'll pay HMRC.

6. Net off the PAYE and CIS account

That will leave your PAYE account showing a debit of £100 and the CIS bank account showing a credit of £100. We need to net these off, and the best way to do that is by navigating to the 'Banking' tab, selecting 'Bank Accounts' from the drop down menu and choosing the CIS bank account. Then, enter a manual transaction, a refund, of £100, with type PAYE / NI.

What happens next?

This is how the transactions should look in your business bank account in FreeAgent.

This is how the transactions should look in your CIS bank account in FreeAgent.