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

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

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

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

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

1. Add the opening balance

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

For example, if the bill was for £300 (which includes a £60 CIS deduction), you’d enter a figure of £300 to ‘796 - Trade Creditors’ in your opening balances for the relevant contact. You wouldn’t need to record an opening balance for the £60 CIS amount.

2. Create a dummy bill

Next, once the payment has been made (it would be for £240 in our example), we recommend that you check that the contact has been set as a CIS subcontractor contact. Then, add a dummy bill for the subcontractor dated the same day as the payment date, using one of the CIS cost categories to make sure that it shows the CIS deduction. 

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

We would expect that the original bill would have indicated that reverse charge VAT should apply, but don’t tick the ‘Reverse Charge’ VAT option on this bill since you’ll have already included the original on a previous VAT return outside of FreeAgent.

You would then explain the payment in the Banking area as a Bill Payment to mark the bill as paid.

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 cost figure generated by the bill and clear the opening trade creditor balance.

For the first manual bank transaction, select ‘Other Money Out’ as the Type, ‘Payment to Initial Creditor’ as the Category, the contact who you owed money to and enter the value of the bill (£300 in our example).

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

For the second transaction, select ‘Refund’ as the Type, ‘Materials’ (the non-CIS materials category) as the Category and enter the same value (£300 for this example). If you are cash accounting for VAT, make sure that you choose 20% VAT for this entry so that it cancels out the VAT that FreeAgent will account for on the other manual entry.

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

4. Create journal entries

As the bill was created as a CIS bill, the value will have been added to the relevant CIS cost category. The refund will have been posted to the non-CIS category for materials (103) because it’s not possible to explain a manual bank transaction directly to a CIS cost category.

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 (£300 in our example) in the CIS cost category and the non-CIS materials category:

• Debit ‘103 - Materials’ with the value of the bill (£300 in our example)
• Credit the CIS cost category you used for the bill with the value of the bill (£300 in our example)

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

The bill payment should show on the CIS300 return and the subcontractor payment and deduction statement in FreeAgent.