CIS in partnership accounts

This article explains how the Construction Industry Scheme (CIS) works in FreeAgent if you have a partnership account.

For invoices and bills that are created in FreeAgent that are going to be impacted by CIS, you’ll need to account for CIS deductions by following the steps below.

CIS invoices

1. Create the invoice

First, you’ll need to create an invoice for the relevant work.

Navigate to the ‘Work’ tab at the top of the screen and select ‘Invoicing’ from the drop-down menu.

Select ‘Add New Invoice’ and follow the steps for creating an invoice in FreeAgent for the full value of the completed work. Don't deduct the tax from the value of the invoice as this will result in the income being too low.

You may wish to add additional text to the invoice to outline the expected reduced payment.

2. Split the bank transaction

The contractor who receives the invoice will likely pay less than you invoiced them for if the partnership isn't registered for Gross status for CIS with HMRC. This will either be 30% less if the partnership isn’t registered as a subcontractor with HMRC (or the contractor can't verify the partner) or 20% less if the partnership is registered.

Therefore, when the payment for the invoice has been imported into your FreeAgent account you’ll need to split the bank transaction to pay off the invoice in full.

Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Choose your business bank account from the list, select the transaction that relates to the invoice payment and then select 'More options'. Alternatively, you can open ‘More options’ by pressing the 'Alt' key or ‘Option’ key, depending on your device, at the same time as selecting a bank transaction.

Explain the invoice payment

Select ‘Invoice Receipt’ from the ‘Type’ drop-down menu and enter the full amount of the invoice in the ‘Value’ field.

Select the relevant invoice from the ‘Invoice’ drop-down menu.

Select ‘Create New Explanation’ to complete the process and mark the invoice as paid in full.

Explain the remaining balance as Drawings

Next, you’ll need to categorise the remaining balance of the bank transaction. You’ll notice that FreeAgent has created a new red unexplained Money out transaction for the difference. This should be explained as Drawings since it is included as part of the partner’s Self Assessment Income Tax.

Select this new transaction, select ‘Money Paid to User’ from the ‘Type’ drop-down menu, the relevant partner from the ‘Payment to’ drop-down menu and ‘Drawings’ from the ‘Category’ drop-down menu.

Select ‘Explain transaction’ to complete the process.

To make sure that the same tax isn’t paid twice, CIS deductions need to be entered into the relevant box on the Partnership page of the Self Assessment form when filing with HMRC. Please note that it’s not currently possible to file the partnership return, or tax returns for partners, through FreeAgent. Therefore, this would need to be done outside of FreeAgent.

CIS bills

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.