CIS Suffered and Factoring Companies

CIS Suffered and Factoring Companies

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Hi guys,

Quick question. I work for a construction company who uses a factoring company to help with cashflow. 

Our old system was to raise sales invoices gross, send to the client, await payment and finally raise a sales credit for the deductions (CIS suffered/discounts/CITB levies). Once sent to the client, we could upload to the factoring company to allow partial drawdown of funds against that invoice.

We have since moved to a new factoring company, who will not accept gross invoices. Any invoices we raise must be net of any deductions. I understand why, in that they don't want to fund something that will be credited off later, but I cannot wrap my head around it in the system. I'm pretty new to the industry and would be grateful for any help offered!

The only way I can imagine making it work in our accounts would be to raise a net sales invoice for works completed, and then a secondary sales invoice for deductions and send both to customer; use a bank to mark receipt of net funds and a contra account to mark receipt of CIS deduction, followed by a BP to tax liability account to record it? It seems a lonnnngggg way round and potentially confusing for clients as well?

Cheers,

Steve

Replies (3)

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By DKB-Sheffield
01st Jan 2015 13:58

It is a long way round and...

... fundamentally flawed.

I'm sure I will be corrected but...

Invoice...

 - You should always issue the full GROSS invoice to your contractor.
 - It is then for the contractor to make deductions as defined by HMRC during the verification process
 - You do not reduce, discount or credit your invoice accordingly as this is not for you to do.

Payment...

 - The contractor underpays you by 30%, 20% or 0% as defined
 - They effectively pay HMRC the 30% or 20% CIS deduction instead of you.

Your entry (for your records only) is then to underpay the invoice by the contractor's CIS deduction and transfer the underpaid amount to the "CIS deductions suffered" account.

With a factoring company, you clearly underpay the invoice by their commission level as well and transfer the value to you "factoring fees" account.

With your suggestion...

You are sending your client an invoice (not for payment to the factoring company) for the deductions you assume are relevant. Your client should deduct CIS from this in the usual way (e.g. 20% of net labour).

You are then sending your client an invoice (for payment to the factoring company) for the value of the invoice less the assumed deductions. Your client should also deduct CIS from this invoice in the usual way (e.g. 20% of net labour).

So what you end up with is a payment directly from the client for 80% of your assumed deductions plus your client should send a payment to the factoring company for 80% of the assumed "net invoice".

I would honestly state that your factoring company is in the wrong. Ask them to explain how this works for other CIS clients and whether they have been given authority by HMRC allowing them to act in this way.

Typically with factoring companies they forget that it is you who is their customer and not the other way around. Strangely enough, you will soon be classed as their customer (and not their issue) if HMRC investigate incorrect accounting for CIS!

Good luck!

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Euan's picture
By Euan MacLennan
01st Jan 2015 14:26

Gross status

If your company qualifies for gross payment status, that would solve your accounting problem and help with your and cash flow.

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Replying to stuart carpenter:
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By DKB-Sheffield
01st Jan 2015 15:21

Gross status

Euan MacLennan wrote:

If your company qualifies for gross payment status, that would solve your accounting problem and help with your and cash flow.

Yes Euan, that is something I did not include within my answer for fear I would still be writing into the 2016 new year.

That would however solve all of the issues... if gross status (0% CIS) is available.

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