Deal with CIS invoices that are outstanding when you start using FreeAgent

This article explains how to enter and manage Construction Industry Scheme (CIS) invoices that are outstanding on your FreeAgent start date.

For CIS sales invoices dated before your FreeAgent start date but paid after, you’ll need to:

1. add the full invoice value to your opening balances
2. create a dummy invoice
3. add two manual bank transactions
4. create journal entries

If you're a contractor and have CIS bills outstanding on your FreeAgent start date, please read how to deal with Construction Industry Scheme (CIS) bills that are outstanding when you start using FreeAgent.

1. Add the opening balance

First, you’ll need to enter the amount owed by the relevant contact at your FreeAgent start date to your opening balances.

For example, if the invoice was for £240 (which includes a £48 CIS deduction and therefore you will receive £192), you’ll enter an amount of £240 to ‘681 - Trade Debtors’ in your opening balances for the relevant contact. You wouldn’t need to enter an opening balance for the £48 CIS amount.

2. Create a dummy invoice

Next, once the payment has been received (it would be for £192 in this example) we recommend that you create a dummy invoice dated the same day as the payment date, which includes the CIS deduction. For this example, an invoice for £240.

The dummy invoice is for accounting purposes only and would not be sent to your contractor as they would have already been issued an invoice using your previous accounting solution. 

We would also usually expect the invoice to be a reverse charge supply so you may wish to choose the ‘Reverse Charge’ VAT option.

You would then explain the payment in the Banking area as an Invoice Receipt to mark the invoice as paid.

To ensure nothing is entered on your VAT return for the invoice you would need to adjust the value of box 6 to remove it.

3. Add two manual bank transactions

You can then add two manual bank transactions dated the same date as the payment date, to net off the sales figure generated by the invoice and clear the opening trade debtor balance.

For the first manual transaction, select ‘Sales Refund’ as the Type and enter the full pre-CIS value of the invoice, £240 in this example.

Select ‘Create and Add Another’ at the bottom of the screen.

For the second transaction, select ‘Other Money In’ as the Type, ‘Receipt from Initial Debtor’ as the Category, the contact who owed money to you and enter the same value, £240 for this example.

Select ‘Create and Finish’ at the bottom of the screen. 

To ensure nothing is entered on your VAT return for either of the manual entries, you would need to check the values of boxes 6 and 7 and edit them as necessary. Any entries in boxes 1 and 4 created by the manual entries should cancel each other out.

4. Create journal entries

As the invoice was created as a CIS invoice, the value will have been added to the relevant CIS income category. The sales refund will have been posted to category ‘001 - Sales’ because it’s not possible to explain a manual bank transaction directly to category ‘062 - CIS Income’.

So in order to keep the accounts correct, the final step is to create journal entries on the same date as the payment date, to net off the balances (£240 in our example) in the CIS income category (062) and Sales (001):

• Debit ‘062 - CIS Income’ with the value of the invoice (£240 in our example)
• Credit ‘001 - Sales’ with the value of the invoice (£240 in our example)

By making these entries into your FreeAgent account, your opening balance should be cleared within the contact, the invoice should show as having being paid and the income amount created by the invoice should show as having been removed (as the income will have already been taken into account in your accounting records prior to using FreeAgent).