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• # 122243
• Mon 10 Oct 2022 08:10 PM

Hi,

Am an ICB student and hoping that a Xero guru can kindly advise me on using Xero for a CIS subcontractor (VAT registered) particularly on Invoice Account codes & Tax rates.

Have a basic understanding of CIS i.e. if work falls under CIS then deductions required on labour, overnight expenses & mileage but no deductions on materials and that these deductions are sent by contractor into HMRC for holding against the subcontractors tax/NI.

Also know that invoice must state rate of VAT & clearly state DRC for a non end user, etc. 

Issue I have is transposing this correctly into Xero (as a newbie) & despite asking Xero support, just get pointed to help files which I have already studied to no avail.

For ease, have set up item codes for main items - labour, overnight expenses, mileage & materials.

On invoice have applied all of these accordingly (except materials) to account code 210 CIS Labour Income with a tax rate of DRC@20% (VAT on income) so correct deduction made - is this correct?

Then have got stuck on materials - I know it can't go under same as no deduction required so would I set this to code 310 Cost of goods sold but then saw 310 or maybe 200 - Sales ( although thinking that may need to amend account code name to a 200 Sales - CIS & also have a 201 Sales - non CIS - for when work is for a private householder so doesn't come under CIS and then will be easy to report on)?

Also would the tax rate still be DRC@20% (VAT on Income) for materials as that is what is old invoices are showing he has done in the past (said he was told to by contractors).

They have been reimbursing him the full materials cost & then he puts through VAT amount on VAT return - is that correct as seems to me he is getting more than paid back - might be my frazzled logic at this stage?

Hoping that made some sense and help and advice very gratefully accepted.

Thank you very much.

Carrie

• Carrie

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• # 122244
• Tue 11 Oct 2022 11:30 AM

Hi Carrie,

The DRC 20% will be charged on both materials and labour.  It does sound like a good idea to have separate income accounts for CIS labour income, CIS materials income, Non-CIS labour income and Non-CIS materials income (if needed).

For the materials, these will show as an 'in' and an 'out' as it were.  So the Materials income will either be at DRC 20% or 20% for non-contractor.  Materials expenditure will be at the VAT rate specified on the bill.

It will feel like he is reclaiming VAT on materials, but not paying the VAT on sales of materials across to HMRC.  For the final contractor who invoices the customer, this will be the other way around - they will not have VAT to reclaim, but will have to pay the output tax to HMRC.

Does that help?

Fiona

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• # 122246
• Wed 12 Oct 2022 09:09 PM

Hi Fiona,

Thank you so much for your response.  

Just so I’m 100% clear.  I would set up 2 new account codes under revenue for the materials e.g 211 CIS materials & 212 Non CIS materials (already have them for the CIS and non CIS labour) and on the invoice to the Contractor I would enter the materials with appropriate 211 or 212 account code and a tax code of DRC if falls under CIS or VAT at 20% if non CIS?

Is that correct?

And the materials amount entered on the invoice to the contractor will be for the full amount paid i.e. including VAT even though the contractor cannot claim the VAT back as they did not pay it & don’t have the receipt?  

As you say, it does indeed feel a little odd that he will be claiming the VAT back on his original purchase receipt for the materials but not on the sales income from the materials but hey ho if that is the correct way to do it.

I think I got completely confused as someone else told me to put the materials under either the 310 Cost of goods sold expense account code or the 322 CIS materials purchased but I thought this was for the contractor to use when he pays for materials on receipt of a subcontractors invoice.  Seemed odd that there isn’t a CIS materials income code already in the Chart of accounts.

My brain went into overthinking mode!

Thank you so much again for your help on this.

• Carrie

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• # 122247
• Thu 13 Oct 2022 07:36 AM

Hi Carrie,

Yes to your first question - that will be a straightforward way of doing it.  Then you can set the right default VAT codes in the chart of accounts.  Maybe there's not a separate code because some people would do this by setting up 'products' in the inventory section of Xero instead.

Regarding the second part, the amount charged will be the actual cost to your client, which is the NET amount.  This is because they will reclaim the VAT on the purchases.  The purchases will go in Cost of Goods sold, so the amount charged for materials should be equal to the amount paid for materials, at least for work for a contractor.

There are a couple of helpful blogs here about making sure the right amount is charged for materials:

https://www.mapartners.co.uk/blog/cis-treatment-of-materials/

https://amrbookkeeping.co.uk/news/cis-rules-on-materials-and-labour

F

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