From Hard Hats to Hard Numbers: Nailing CIS in D365 F&O

The Construction Industry Scheme (CIS) is a tax framework in the United Kingdom. Under CIS, contractors who hire subcontractors for construction work are required to deduct money from their payments to subcontractors. This deducted amount is then passed on to the UK tax authority, HM Revenue and Customs (HMRC), serving as advance payments toward the subcontractor’s tax and National Insurance (social security) contributions.

This critical piece of tax legislation forms part of the UK globalisation feature set in D365 F&O and there’s a reasonable chance it will crop up as a requirement on a UK implementation.

We’ve noticed there’s a lack of comprehensive end-to-end instructions (with screenshots) for setting up CIS in D365 F&O, so here is a step-by-step guide for configuration, master data, and running transactions. Starting with a bit of background…

What are the rules?

If any organisation both (i) pays subcontractors and (ii) has spent over £3 million on construction work in the past 12 months, it must register with HMRC as a Contractor in the scheme. The rules also apply to businesses based outside the UK, if they engage in construction work in the UK.

Subcontractors do not have to register with the scheme, but the deductions applied are higher if they do not. Currently, the deduction rate for registered Subcontractors is 20%, whilst for unregistered Subcontractors it is 30%.

What’s included?	What’s excluded?
Preparing sites (e.g., laying foundations)	Architecture
Demolition and dismantling	Surveying
Building work, alterations, and repairs	Non-construction tasks
Installing systems (heating, lighting, etc.)
Civil engineering work (roads, bridges, etc.)

Full details of the rules and applicability of the scheme can be found on the UK Government website: CISR10000 – The Scheme: contents – HMRC internal manual – GOV.UK (www.gov.uk)

How do we configure CIS in F&O?

1. Under Organisation administration > Organisations > Legal entities
   • Ensure the applicable legal entity is setup in the system, with the Country/region set to “GBR”, for “United Kingdom”, to enable the localisation
   • In the legal entity record, find the field ‘Accounts office reference number’, located under Registration numbers > United Kingdom.
   • Paste the PAYE reference number for the organisation into this field. For reference, it should have this format: 123PX00123456
   • This step is required to include the PAYE reference number on the CIS statement

2. Under Tax > Indirect taxes > Withholding tax > Withholding tax authorities
   • Ensure a record has been created for HMRC, similar to the screenshot below
   • This is separate to the entry you will have under Tax authorities for HMRC, albeit probably linked to the same Supplier account

3. Under Tax > Setup > Withholding tax > Ledger posting groups
   • Create a posting group. The example shows one group for all withholding tax, but if different main accounts are used for different withholding taxes (e.g. CIS, RCT), then create multiple posting groups
   • Assign the corresponding main accounts from the business’ chart of accounts

4. Under Tax > Setup > Withholding tax > Withholding tax settlement periods
   • Define the periods, likely the same as the financial periods

5. Under Tax > Indirect taxes > Withholding tax > Withholding tax codes
   • Create the codes to be applied to suppliers. We’ve just done one in this example, but ideally there should be two, based on the current rules: 30% (for unregistered subcontractors) and 20% (for registered subcontractors)

6. Click Values on the Action pane
   • Define the value for the tax code that you’ve just created, in this case, 20%
   • You can apply different values with future effective dates in this form, when the rules inevitably change in future

7. Under Tax > Indirect taxes > Withholding tax > Withholding tax groups
   • Create a new withholding tax group for all CIS-related codes, allowing you to keep your codes organised
   • Add the withholding tax code(s) that you created in step 5 above

Setting up master data correctly

With configuration in place – hopefully you won’t need to touch this until any rules change – we can turn our attention to setting up our master data. Quick reminder – master data is things like customer, suppliers, and products.

1. Under Purchase ledger > Suppliers > All suppliers
   • Create your subcontractor. Hint: they probably won’t be called “CIS Supplier”!
   • Ensure that in the Invoice and delivery FastTab, the switch for Calculate withholding tax is set to Yes and that you have selected the Withholding tax group for CIS
   • In the Construction industry scheme FastTab, populate the Company registration number (CRN) and Unique tax payer reference (UTR)
   • Once the subcontractor’s status has been verified with HMRC, set the Verification date and populate the Verification number fields

2. Under Tax > Indirect taxes > Withholding tax > Item withholding tax groups
   • Ensure a group is created for CIS

3. Under Product information management > Products > Released products
   • Create any items or services that are subject to CIS
   • Ensure that in the Purchase FastTab, the switch for Calculate withholding tax is set to ‘Yes’ and that you have selected the Item withholding tax group for CIS

4. Under Procurement and sourcing > Procurement categories
   • Create any categories for services that will not be captured as released products
   • Ensure that in the Item VAT groups FastTab the switch for Calculate withholding tax is set to ‘Yes’ and that you have selected the Item withholding tax group for CIS

Running a CIS-dependent transaction

That’s everything in place that we need to run CIS within the business, so now let’s prove it works!

1. Under Procurement and sourcing > Purchase orders > All purchase orders
   • Create a PO with your CIS subcontractor and CIS item(s)
   • Under the Line details FastTab, in the Setup tab, check that the Withholding tax groups have auto-populated
   • Approve, issue and manage your PO as normal from here

2. Under Purchase ledger > Invoices > Pending supplier invoices
   • Once the service has been delivered and the supplier invoice has been received, you should see check that the Withholding tax groups have auto-populated again, under the Line details FastTab, in the Setup tab

3. Under Purchase ledger > Payments > Supplier payment journal, you’ll be ready to process the payment of the supplier

4. When you click Settle transactions, just above the Grid view, you’ll see a dialogue box like the one below
   • Note the blue information banner informing you that withholding tax has been calculated

5. Select the Withholding tax tab to view what has been calculated

6. Click OK to return to the main Supplier payments form

7. Click Post

8. Await confirmation that the operation has completed successfully

..

Getting the reports you need

The last things we need are (i) our statement to subcontractors, to inform them of their monthly withholding tax deductions, and (ii) a summary of all CIS transactions within the business, to settle with HMRC.

1. Under Purchase ledger > Payments > Supplier payment journal
   • From the Action pane, select Print > Statement to subcontractors

2. In the dialogue box, check the date criteria are correct, then click OK

3. The system will produce the Subcontractor statement for you to action accordingly

4. Under Tax > Declarations > Withholding tax > Withholding tax payment
   • Check the criteria in the dialogue box are correct and click OK

5. The resulting grid view can be filtered, manipulated, and saved to produce a report to HMRC, or PowerBI can be used to automate this output

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And there we have it! It’s been a fairly epic post, but hopefully now configuring and using CIS in D365 F&O makes a little more sense.