I have a new client who is a sub contractor and has 20% CIS deducted from his wages.
I am trying to figure out how to record thisin my system, I am using VT Transaction+. I'm guessing that on the actual self assessment you would include the gross amount on the wage slip to the total taxable profits and then fill in a box under the CIS section recording the total amount of CIS paid. Because I have never dealt with CIS before I'm not sure how they actually request it to be shown on the self assessment.
To record the transaction on VT include the gross amount as a sale. You will then need to remove the CIS element to drawings. This should be able to be done with a journal and this will then leave the net figure on your sales ledger.
At the year end you will record the trade as normal on the Tax Return. On the tax calculation page there is then a box for tax deducted under CIS.
Remember that whatever your clients year end is the CIS figure you put in the box on the Tax Return is the amount deducted between 6th April and 5th April.
In my experience if your client is a basic rate tax payer and not VAT registered you should expect a Tax refund at the year end.
Aaaaah thanks Rob this is just what I needed. Whilst waiting for your reply I decided to post the gross as a receipt to sales and the CIS as a payment Debit Expenses through CIS payments through sub contractors, I think your way will show a truer picture so i'll edit it.
By the sounds of it your would have ended up deducting the CIS tax as an expense and that is not correct.
The gross sale is your income and the CIS gets deducted from the tax due after you have calculated it. In other words the CIS tax is never an expense and never gets shown in a set of accounts.
There is a simpler way of doing it than processing the transaction then doing a separate journal entry. Have a search for CIS in the user guide. It has some worked examples with pictures.
Thanks Rob that would be great.
Yes I will have a look Kris, that probably would have been the most obvious thing to do. Do you know if I can download it from the Internet? I have the user guide for Cash Book is this the same thing? Thank you!
In other words the CIS tax is never an expense and never gets shown in a set of accounts.
Sorry but I disagree, the CIS deducted by the Contractor is effectively a Current Asset in the balance sheet of the Subbie. At the end of the tax year it's either a debtor that will be repaid by HMRC or will be offset against any further liability.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
the CIS deducted by the Contractor is effectively a Current Asset in the balance sheet of the Subbie. At the end of the tax year it's either a debtor that will be repaid by HMRC or will be offset against any further liability.
To clarify the point above, CIS deductions of a sole trader are not a debtor.
The personal taxation liabilities of a sole trader are a personal expense and are never provided in a set of accounts. The CIS deductions are an advanced payment of the subcontractors personal tax and as a result they are a personal deduction from sales and should be shown as drawings, as any personal tax payment would be. Should the subcontractor decide to introduce any tax refunded into the business this would be shown as capital introduced.
But if you where preparing a set monthly accounts for a sole trader who wanted to know his potential tax liability, why would you not show CIS payments on account as a "debtor"? I appreciate that at the end of the year he's free to move the balance to capital introduced or drawings but during the year I'd personally report it as part of their business affairs.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
If that were the case then you would have to make a monthly provision for his personal tax liability in the accounts and I would never do this as it is a personal liability.
I can see where you are coming from but if a client paid himself 20% of all sales and put this into a savings account towards his tax you would show this as drawings and the same principal applies here.
I can see where you are coming from but if a client paid himself 20% of all sales and put this into a savings account towards his tax you would show this as drawings and the same principal applies here.
I don't know, I think there's a difference between placing the money in a savings account "intending" to pay HMRC and HMRC physically having the money already. But I take your point entirely Rob.
Regarding the tax liability, your right and I wouldn't post a monthly provision either but I do include an estimate under a "headline summary" for clients, as I get asked the question so often.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
If you were a Limited Company you would show the CIS deductions as a debtor and this is why VT suggests you do. The CIS treatment of a company and of a sole trader are entirely different and most softwares can't distinguish the difference.
However insurance is a business expense, as already mentioned CIS is a personal deduction for a sole trader and should be shown as drawings.
If the client paid his home insurance through the business I wouldn't prepay it, it would all go to drawings.
I deal with both in the same way. CIS is shown as a debtor in sole traders I deal with too. To show CIS and prepayment as drawings may make no difference to profit, but it does not reflect the true financial position of the business in the balance sheet. I know you're going to tell me for sole traders you don't need a balance sheet, but people pay me to show them the full picture of their business finances and this includes accurately showing debtors, creditors, prepayments and accruals.
I agree we should show a balance sheet on sole traders to accurately show a full picture.
There is one big difference however, and that is the CIS tax treatment.
A Limited company can offset its CIS deductions against PAYE however a sole trader has to offset this against personal tax.
In a limited company you would provide for Corporation Tax but you would never provide for the directors personal tax.
Same goes for a sole trader, you provide for business taxes (PAYE / VAT) but not for personal taxes (proprietors own tax and CIS deductions are a payment of this).
If CIS is shown as a debtor for a sole trader you are increasing assets however this will not be repaid to the business as it will be offset against personal tax so by including a debtor you are overstating assets unless you have a creditor for personal tax and this would be the same as providing for a directors personal tax in a Limited Company.
Personally, I think that a sole traders liability to income tax flows from operating a business and therefore it's reasonable to record the transactions that flow from being in business in it's records. I would argue that the "debtor" is repaid, when the tax liability crystallises and in my experience many sole traders pay the tax liability from the business account. It makes sense to me to adjust drawings / capital introduced at that point.
Part of my thinking is that if you record CIS payments on account it would get "lost" in drawings and in order to help the client understand their position it's better to highlight the deduction in the balance sheet.
__________________
Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
I do understand where you are coming from all I am saying is technically it is not an asset of the business and therefore to include a debtor is incorrect but in saying that if the client wants it shown there then who are we to argue.
With regards to the items getting lost I always record the deductions in a spreadsheet and keep this with other personal tax information such as interest statements.
Including a debtor can become very confusing if you have a yearend that isn't 5th April as the CIS recovered for the year will be different to the debtor.
Showing the tax of an individual in a business can be difficult because what tax rate do you use? We can calculate the tax due on profits but what if the client has other income, if we only show the tax due on profits then the client will have a larger tax bill come the year end and surely we are misleading them?
The thing is it is a subjective area and ultimately we just need to represent the information in a way that our clients can use and understand so there really is no right or wrong answer with management information.
My only concern comes from my experience in practice. I worked in practice for 15 years before setting up my business and I know if I have received records from a bookkeeper showing CIS as a debtor for a sole trader it would have been the prefect excuse to increase my fees as I would have had to adjust the accounts.
I know if I have received records from a bookkeeper showing CIS as a debtor for a sole trader it would have been the prefect excuse to increase my fees as I would have had to adjust the accounts.
Surely a simple journal entry at the end of the year doesn't justify an increase in fees?
Personally I find that this is one of the main reasons that none of my clients use accountants. Most have relayed horror stories of crazy fees from both the accountant and later from HMRC when mistakes are discovered. When I see the accounts most are riddled with errors, and thats only from the accountants who will even speak to me.
Personally I think accountants in general are OK and do a good job. They will have specialist knowledge and can offer better advice to clients, especially with regards to tax and planning.
I get on well with my local accountants and they can be a good source of referrals for new clients.
However the more they have to adjust the more they will charge and it will put your figures in doubt so the more they will need to check.
Coming back to the main sticking point in this question, my opinion: I don't show CIS tax deducted for a sole trader as a debtor, as it is effectively a payment on account of the trader's personal tax liability. I can think of other, non CIS, sole traders who have to make payments on accounts, which are not treated as debtors.
For my own convenience, I tend to follow Kris' method of offsetting the invoice payment short fall, to a CIS debtor account.
For me this gives me a figure for the SA return, particularly a Partnership, where it is not an individual that it applies to.
I do not leave the balance on the balance sheet but move it to an appropriate drawings account.
For me it just a method, and I suppose it is feasible to create a seperate Drawings account for CIS (Or a partnership CIS Deductions account) in the capital Accounts
