How to record CIS deductions in Xero?
This is a short tutorial on how to correctly record CIS Deductions in Xero cloud accounting package. This method can be easily replicated to other accounting packages.
What is CIS Deduction?
CIS short for Construction Industry Scheme is a type of taxation introduced by HMRC to the construction industry. In a nutshell, it means that any contractor operating within construction industry has to register to CIS and deduct tax on labor only from payments made to subcontractors.
Contractor John has got a contract to build a house but he knows he needs help such as (additional builders, plumbers, electricians, and cleaners). John has hired subcontractor Ben who can provide work and perhaps some of the materials. The build is finished and Ben would like to get paid so he issues an invoice to John for materials he bought at a value of £2000.00 and for the labor at a value of £1000.00 making a total for the invoice £3000.00. John pays an invoice from Ben. The payment sent to Ben is at a value of £2800.00 because John has deducted £200 worth of CIS on labor. If Ben was not registered for CIS himself then John would deduct £300 on labor as that is 30% rate for subcontractors who are not registered.
Subcontractors have to be verified with HMRC before they are being paid. Verification will allow the main contractor to deduct the correct amount of money from a subcontractor.
Deducted CIS is then paid to HMRC through PAYE system.
If CIS has been deducted from our company then it is claimed back through PAYE system or if our company does not employ anyone and does not operate PAYE then it will be claimed on the tax return.