How to record Construction Industry Scheme (CIS) transactions if you’re both a contractor and subcontractor

This article explains how to enter Construction Industry Scheme (CIS) transactions into FreeAgent if you're both a contractor and subcontractor.

When you’re a contractor, you'll receive bills from your subcontractors, but you won't pay the full amount of that bill to the subcontractor as part of it will be paid to HMRC. For more information about the CIS, please see HMRC’s guidance.

If your subcontractor is operating the CIS reverse charge on their bills to you, please read this guidance first.

1. Create a bank account for the CIS deductions

First, you’ll need to add a dummy bank account and give it a suitable name, such as ‘CIS Deductions’.

2. Enable CIS in FreeAgent

Next, select 'Settings' from the drop-down menu in the top-right corner and then select 'Construction Industry Scheme'.

Select ‘Enable CIS support’.

If you have a limited company account type and haven’t already run payroll, FreeAgent will ask if you are making submissions via RTI payroll. As you won’t be able to use FreeAgent’s payroll functionality if your business operates as both a contractor and subcontractor, select ‘No’ in answer to the question ‘Will you submit RTI payroll in FreeAgent?’.

Choose the CIS deduction rates you’d like to create and select ‘Enable CIS support’. Please note that all three rates will be selected by default.

If you know that one or two of these rates won’t apply to you, you can deselect them and they won’t be available when you create your invoices. However, please be aware that once you’ve created your first invoice, these CIS rates can’t be changed. Therefore, you may prefer to leave all three available in case you need them at a later date.

3. Add CIS to your invoices

When you want to issue an invoice to your contractor, navigate to the ‘Work’ tab at the top of the screen, select ‘Invoicing’ from the drop-down menu and select 'Add New Invoice'.

In the ‘Invoice Details’ section, select the relevant CIS deduction rate you’d like to add to the invoice. If you’re already enrolled in the CIS scheme, you should know which category to select here. If you’re not sure, find out more on HMRC’s website.

If you need to operate the CIS reverse charge on your invoices, please read this guidance first.

When adding the CIS line item to the invoice, select the relevant CIS deduction rate from the ‘Income Category’ drop-down menu.

Once you’ve entered the relevant details, select ‘Create and Finish’. If you need to add non-CIS line items, select ‘Create and Add Another’. FreeAgent will only apply a CIS deduction to the relevant line item(s).

Find out more about how to create an invoice.

4. Add the subcontractor's bill

Your subcontractor will present you with a bill which you’ll then need to enter into FreeAgent.

To do this, navigate to the ‘Bills’ tab at the top of the screen and select 'Add New Bill'.

In the ‘Bill Contents’ section, enter the full amount of the bill in the 'Total Price' field.

Once you’ve entered the relevant details, select ‘Save and Review’ to complete the process.

Find out more about how to create a bill.

5. Pay off the bill

When you pay your subcontractor, you'll see a payment coming out of your business bank account for the amount of the bill minus the amount you’re paying to HMRC.

Once the relevant bank transaction has been imported into FreeAgent via a bank feed or uploaded from a bank statement, you’ll need to explain it as a transfer from your business bank account to the dummy CIS bank account you created. Don’t explain this as a ‘Bill Payment’.

Next, navigate to the CIS deductions bank account in the ‘Banking’ area, select ‘More’ and choose ‘Add Transaction’ from the drop-down menu.

Select ‘Bill Payment’ from the ‘Type’ drop-down menu, enter the date and the full amount of the bill and select the relevant bill from the ‘Bill’ drop-down menu.

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

6. Pay the CIS tax

Once the bank transaction relating to the payment of CIS tax from your business bank account has been imported into FreeAgent, select ‘Payment’ as the transaction ‘Type’ and ‘PAYE/NI’ as the ‘Category’.

7. Net off the PAYE and CIS account

As no payroll is being run, you’ll need to make some adjustments between categories ‘814 - PAYE/NI’ and ‘812 - CIS Deductions’ (on the sales invoices), to allow for the amounts that have been netted off between the two. If you’re unsure which adjustments are required, please ask your accountant.

To make the adjustments, first you’ll need to enter a manual bank transaction from your CIS deductions bank account.

Select ‘Refund’ as the transaction ‘Type’, enter the amount of CIS tax in the ‘Value’ field and select ‘PAYE/NI’ as the ‘Category’.

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

This will clear the balance from the CIS deductions bank account but take the balance on account ‘814 - PAYE/NI’ to a credit balance for the amount of CIS tax that was deducted from the subcontractor's bill.

Therefore, you’ll need to create the following journal entries:

• Credit ‘812 - CIS Deductions’ for the amount of CIS tax that was deducted from the subcontractor's bill
• Debit ‘814 - PAYE/NI’ for the amount of CIS tax that was deducted from the subcontractor's bill

If you’re unsure which journal entries are required, please ask your accountant.

How CIS deductions from your invoices work in FreeAgent

FreeAgent will automatically recognise the CIS deductions you've incurred when you explain payments you've received against your CIS invoices. If you’re not running payroll and don’t clear them by means of journal entries, these deductions will accumulate in your CIS Deductions account which you can view on your Balance Sheet.

The balance in this account will represent the accumulated total of CIS deductions you've incurred, but haven't yet offset against other taxes you owe.

To ensure the balance in the 'CIS Deductions' accounts is correct each tax year, you need to return the balance in this account to zero at the start of the new tax year. If you’re a sole trader, you can do this by creating journal entries to move the amount in the 'CIS Deductions account (812)' to the 'Capital Account (901)'. If your business is a limited company, we would suggest the journal entries listed in section 7 above. If you're unsure which journal entries are required, please ask your accountant.

Adding CIS deductions to your Self Assessment tax return

If you’re a sole trader, you’ll need to enter your CIS deductions on your Self Assessment tax return. You can use the balance that's accumulated in your ‘CIS Deductions’ account in the tax year you're completing your Self Assessment tax return for. Enter this value in box 38 if you complete short self employment pages or box 81 if you complete long self employment pages.

If you’re unsure what figure to enter on your Self Assessment tax return, please ask your accountant.