CIS Scheme

[honada]

I would appreciate advise on how to account and record a payment to a subcontractor under the CIS Scheme, I am trying to help my partner who has started a limited business.

Would I be correct to assume that a subcontractor is a supplier and when I arrange a payment I would debit the supplier with the total amount and credit bank (amount less 20%) and credit CIS account with the balance.

I have worked in accounts but never been involved in the CIS Scheme, my partner is using a free account package (easybooks)

Any help would be great.

thanks

 

[Scalloway]

Yes, you are settling the debt by paing the supplier net and paying the balance to HMRC as CIS tax.

 

[honada]

Thanks for your reply.

 

[appyammer]

hi honada

before you pay the subcontractor you need to get them verified by hmrc, this will enable you to:

1) pay them gross
2)stop 20% tax
3)stop 30% tax

when i stop tax i set up a nominal account on the liabilitys (we use sage and the nominal code i use is 2212,description fitters tax) this sits alongside paye and ni for the employed staff

if you dont verify them correctly and stop the wrong tax you will be liable,also if they claim expenses ie: parking,congestion charge,road tolls,fuel you have to deduct tax, materials they supply are exempt and are paid gross

all the info is on hmrc website

 

[honada]

Thanks

I have checked the HMRC website and I am already familiar with the scheme, I am confused with the double entry to the account, when I receive an invoice from a subcontractor should I treat him as a supplier.

Then when paying the subcontractor less 20% the bank will be credited with the amount less 20% and the difference should be paid from the CIS account.

I hope I understand it correctly!

thanks for the help.

 

[EnhanceAccountancy]

when I receive an invoice from a subcontractor should I treat him as a supplier.

Yes, there are a few ways of recording the transaction. Each will have the same overall effect as follows.

When you receive the invoice:
Debit: purchases/expense 100%
Credit: Trade Creditors (supplier's account) 80%
Credit: CIS Payable 20%

Then, when paying supplier the 80%:
Debit: Trade Creditors
Credit: Bank

Finally, when pay 20% CIS to HMRC:
Debit: CIS Payable
Credit: Bank


The overall net effect of the above transactions in your books when you have paid the subcontractor and HMRC will be (just like any other supplier):
Debit: Purchases/Expense 100%
Credit: Bank 100%

Get help from an accountant when posting if in doubt.

Regards,
Gareth

 

[David Griffiths]

When you receive the invoice:
Debit: purchases/expense 100%
Credit: Trade Creditors (supplier's account) 80%
Credit: CIS Payable 20%

That works arithmetically, of course, but the problem as I see it is that it credits the CIS payable account at the date that the invoice is issued, which doesn't help with tracking amounts that are actually due to HMRC.


My preferred option is to raise an invoice in the normal way, showing the subcontractor as being due the full balance. Then on the date of payment raise the cheque for the amount net of deduction, and use that to part pay the invoice. Finish the transaction by raising a credit note, coded to the CIS control account and outside the scope of VAT, dated for the date of payment. That puts the liability to HMRC into the correct month and makes payments easier to track.

 

[EnhanceAccountancy]

Thanks for the very helpful additon David.

That was actually one of the other methods that I was referring to.

I think that the method that will be the most suitable will depend on how well the business manages their payable function. Obviously, using the last method the business will have to make sure that they remember not to pay the sub contractor the full amount like any "normal" supplier.

 

[honada]

Thanks both ways make sense, but as I understand that a return and a payment is due to the HMRC on a monthly basis, does it make any difference if the subcontractor submitted an invoice on a 30 days payment terms, would the liability and the payment to the HMRC will be due from invoice date or payment date?

I have not yet come accross this problem, but any information would be useful for future reference.

 

[David Griffiths]

The CIS return for HMRC is for payments made in the month, not invoices received.

You will be expected to make your monthly return to HMRC on time even if you have not made any payments, so be careful with this. If you aren't using subcontractors, you can tell them and then you won't have to make returns for six months - but if you do unexpectedly use a subbie and make a return you're back on monthly reporting even if it's within the six months.

 

[talkinpeace]

NB
If your partners business is in the CIS area, they will probably have CIS tax deducted from their turnover.
This needs to be included on their tax return if the business is a sole trader
or their P35 if they are a Ltd Co.
All CIS queries are handled through the Newry office which does not take phone calls.
CIS is not for the faint hearted.

 

[honada]

Many thanks for all your help, I have filed the return for the month and entered the transactions as advised. Worked perfect.

thanks again.

 

[mr. mischief]

I also recommend using paid for software for these returns, let me explain why.

A client rang me up to complain that he'd been fined £200 for May and June 2010 submissions I had failed to make. He was right to complain as the HMRC database showed April then went to July and August. HMRC had no record at all that any submissions - one of which was NOT a nil return - had taken place.

But I did have evidence. I had HMRC date and timestamps for both May and June, because I'd used Able Internet software to submit the data. End of story, £200 credit back on the client's account and a grudging apology from HMRC.

Had I been just going to the HMRC site to make the submissions, in my view the £200 fine would have stood because no record of May or June existed anywhere other than on the software package I had used.

This is a more serious version of the database flaw which means that every now and then a client will "disappear" from my client list on the HMRC screen for a few days, meaning I can't access that record.