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Explain bank transactions as CIS income

This article explains how subcontractors can explain money received from a contractor as Construction Industry Scheme (CIS) income in FreeAgent.

If you’re a subcontractor, you need to set up CIS in FreeAgent and then follow the steps below to explain the payments from the contractor once they’ve been imported into FreeAgent.

If you’re creating invoices for the contractor, please follow these steps to record CIS income instead. If you’re also a contractor, find out how to enter CIS transactions into FreeAgent as a contractor.

Please note:

  • You’ll need to have set up CIS in your FreeAgent account in order to explain a bank transaction as CIS income.
     
  • FreeAgent's CIS functionality won't be available if you have a partnership or an unincorporated landlord account.
     
  • If you need to apply the domestic VAT reverse charge to this income, you’ll need to enable non-standard VAT rates before explaining the payments as ‘Reverse Charge’ and ‘Out of Scope’ for VAT.

Once the payment from the contractor has imported into FreeAgent, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Bank Accounts highlighted within the bank accounts drop-down menu

Choose the relevant bank account from the list.

Bank accounts listed under Accounts on the Overview page.

Select the relevant bank transaction.

Unexplained bank transaction highlighted

If the domestic VAT reverse charge applies

Payments for labour only

If you need to apply the domestic VAT reverse charge to the payment from the contractor and the payment relates to labour only, select 'Adjustments' and choose 'More options' from the drop-down menu. 

If you don't need to apply the domestic VAT reverse charge, please see below for details on how to explain the income.

More options highlighted within drop-down menu below Adjustments button on the bank transaction

Select 'Sales' from the 'Type' drop-down menu, ‘Reverse Charge’ from the ‘VAT options’ and ‘Out of Scope’ from the ‘VAT’ drop-down menu.

Sales chosen as the Type, Reverse Charge chosen as the VAT option and Out of Scope chosen as the VAT rate

Choose the relevant CIS income rate from the 'Category' drop-down menu and select ‘Create New Explanation’ at the bottom of the screen to complete the process.

Category drop-down menu highlighted with a CIS income category selected

Payments for labour and materials

If the payment relates to labour and materials, you'll need to split the transaction between the labour amount and the materials amount.

To do this, click on the transaction, select ‘Adjustments’ and choose ‘Split transaction’ from the drop-down menu.

Split transaction highlighted from the drop-down menu below the Adjustments button

Select ‘Sales’ as the ‘Type’, ‘Reverse Charge’ from the ‘VAT options’, enter the amount related to labour in the ‘Value’ field and select ‘Out of Scope’ from the ‘VAT’ drop-down menu.

Sales chosen as the Type, Reverse Charge chosen as the VAT option, amount entered for labour and Out of Scope chosen as the VAT rate

Then, select ‘CIS Income’ as the ‘Category’.

Category drop-down menu highlighted with a CIS income category selected

Select ‘Save and add another’ at the bottom of the screen.

Next, select ‘Sales’ as the ‘Type’, ‘Reverse Charge’ from the ‘VAT options’, enter the amount related to materials in the ‘Value’ field and select ‘Out of Scope’ from the VAT drop-down menu.

Sales chosen as the Type, Reverse Charge chosen as the VAT option, amount entered for materials and Out of Scope chosen as the VAT rate

Then, select ‘Sales’ as the ‘Category’. You can create a custom category for the materials income if you wish.

Sales highlighted from the category drop-down menu

Select ‘Save and finish’ at the bottom of the screen to complete the process and split the transaction between labour and materials.

Bank transaction showing as split between labour and materials income

If the domestic VAT reverse charge doesn’t apply

Payments for labour only

If the domestic VAT reverse charge doesn’t apply and the payment relates to labour only, select 'Sales' from the 'Type' drop-down menu and choose the relevant CIS income rate from the 'Category' drop-down menu.

Sales selected from the Type menu and CIS Income category selected from the Category drop-down menu and highlighted

Select ‘Explain transaction’ to complete the process.

Payments for labour and materials

If the payment relates to labour and materials, you'll need to split the transaction between the labour amount and the materials amount.

To do this, click on the transaction, select ‘Adjustments’ and choose ‘Split transaction’ from the drop-down menu.

Split transaction highlighted from the drop-down menu below the Adjustments button

Select ‘Sales’ from the ‘Type’ drop-down menu, enter the amount related to labour in the ‘Value’ field and select ‘CIS Income’ as the ‘Category’.

Sales chosen as the Type, UK VAT Rates chosen as the VAT option, amount entered as labour and CIS Income category selected

Select ‘Save and add another’ at the bottom of the screen.

Next, select ‘Sales’ from the ‘Type’ drop-down menu, enter the amount related to materials in the ‘Value’ field and select ‘Sales’ as the ‘Category’. You can create a custom category for the materials income if you wish.

Sales selected as the Type, UK VAT Rates selected as VAT option, amount entered as Materials and Sales selected as the Category

Select ‘Save and finish’ at the bottom of the screen to complete the process and split the transaction between labour and materials.

Bank transaction showing as split between labour and materials income

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