CIS in partnership accounts

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

Please note that FreeAgent supports CIS for sole trader and limited company account types but not currently for partnership or unincorporated landlord account types. HMRC requires the filing of monthly returns for CIS which you won't be able to do through FreeAgent, but you can use HMRC’s free online service.

For invoices 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.

1. Create the invoice

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

To do this, 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 via a bank feed or uploaded from a bank statement, you’ll need to split the bank transaction to pay off the invoice in full.

To do this, 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.