When working as a sub-contractor (i.e. you bill your customer and they retain 20% of the bill as CIS tax), yes, the gross amount of the invoice should be recorded as income. Payment is basically in 2 parts - i.e. 80% is for real, money received and put in the bank, the other 20% is 'pretend' received and journalled to an 'asset' account.
When a sole trader, you can think of this as a savings plan, paying your tax for you. It accumulates in the asset account, then when you complete a self assessment tax return, you offset this asset amount against tax you have to pay, because it's already been forwarded to HMRC on your behalf, by your customer.
As a limited company, if you also employ people, and are therefore collecting PAYE tax and NI from your employees that you have to forward onto HMRC each month, you are permitted to offset this CIS tax asset against this payment. So if the PAYE and NI you need to forward for your employees is £500, but you have been stopped £200 by one of your contractor customers, then you can just pay £300 to HMRC by journalling the £200 from the asset account over to the payroll liability account - or something similar in a book!
I hope that makes sense for you.
Carol
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