Hi. I have a client who is a subcontractor and as such when paid by the contractor are only paid the net i.e. less 20%. My query is regarding the output VAT - lets say that we bill the contractor £1500 being £1250 plus VAT at 20% of £250.
As the contractor only pays 80% of the bill due to the CIS, my client only receives £1250 and offsets the £250 against their PAYE/NIC costs.
For the VAT return however, how much output tax is declared. The actual income received is only £1250 so is the output VAT £208.33?
I am new to CIS so have not come up against such issues before. All info much appreciated. I have been on the HMRC website and looked at CIS in general but it doesn't go into a lot of detail.
Although you receive invoice less 20%, output VAT is still £250.
This is because, the 20% that has been withheld by your supplier is paid by the supplier to HMRC and you can deduct this amount from PAYE/NIC due that your company needs to pay. This works similar to PAYE, where you deduct PAYE, NIC's from your employee's gross income, pay NET wages to employee and the PAYE, NICS to HMRC.
Your supplier is doing the same with your invoice. He is deducting the 20% (and most importantly, that 20% is only on your labour element not materials) paying that to HMRC and you now can deduct this from the PAYE, NIC's that your company is due for this month. (In case of self employed, it related to income tax due that needs to be paid).
Let me explain this using your example above.
So now the invoice Net is £1,250, VAT is £250. And say your company's PAYE and NIC due for the month is £400
What happens is, VAT should be treated as normal. But when it comes to PAYE and NIC due, out of the £400 due, your supplier will pay £250 on behalf of your company and you pay only £150.
Journals would be as follows:
1.) When you raise a sales invoice
Cr Sales £1,250 Cr Output VAT £250 Dr Receivables £1,500
2.) When your supplier pays the amount. He will be paying Net less 20% [1,250 - 20%] £1,000 + VAT £250 = £1,250
Dr Bank £1,250 Cr Receivables £1,500 Dr CIS liability £250
3.) When you run the PAYE due (say your PAYE due is £400)
