CIS gross payment status: the tests, pros and cons, and how to apply

Under the Construction Industry Scheme (CIS), contractors usually take tax off the labour part of payments to subcontractors: 20% if you are registered and 30% if you are not. CIS gross payment status is a special status from HMRC that brings this deduction down to 0%. Contractors pay your invoices in full and you settle your own tax and National Insurance through your tax return (or, for a company, through corporation tax).

Sole traders, partnerships and limited companies can all apply, as long as they pass the tests below.

HMRC looks at four tests. You must pass all of them.

1. Compliance test. You (and, for a partnership or company, the people behind it) have filed returns and paid tax on time in the past.
2. Work test. Your business does construction work in the UK.
3. Bank account test. You run your business through a bank account.
4. Turnover test. Your construction turnover in the last 12 months, excluding VAT and the cost of materials, is at or above the figure in the table below.

Say a company has two directors and turnover of £75,000 after taking out VAT and materials. The per-director figure needed is 2 × £30,000 = £60,000, and £75,000 is above that, so it passes the turnover test even though it is under £100,000.

The main benefit is cash flow. On £50,000 of labour, a registered subcontractor has £10,000 held back over the year (£50,000 × 20%). With gross payment status that £10,000 stays in your account from day one.

The main risk is discipline. The tax is still due, just later. A sole trader pays on 31 January and, where they apply, through payments on account on 31 January and 31 July. If you spend the money and cannot pay on time, you lose the cash flow benefit and can lose the status itself. If you would rather receive a refund each year, staying on 20% and claiming back the overpayment can suit you better. Our guide on how to claim a CIS tax refund explains that route.

1. 1

   Check you pass all four tests

   Make sure your returns and payments are up to date and work out your turnover for the last 12 months without VAT and materials.

2. 2

   Gather your evidence

   Have invoices, CIS statements and bank statements ready. HMRC may ask for proof of turnover and that the business is run through a bank account.

3. 3

   Apply to HMRC

   You can apply when you first register for CIS or later if you are already registered. Applications are made to HMRC online through your business tax account, or by contacting HMRC.

4. 4

   Wait for the decision

   HMRC checks your compliance and turnover. If it agrees, it updates your status and contractors who verify you are told to pay you gross.

If HMRC refuses, it tells you why. Usually the reason is a late return or payment, or turnover that is too low. Fixing the cause and applying again later is common.

Timing matters. Apply when your turnover for the last 12 months clearly passes the test, not when it is borderline, and when your recent returns and payments are all in on time. If you are close to the figure, keep a running total of your labour income each month (leaving out VAT and materials) so you know when you have crossed it. Applying before you are ready usually just leads to a refusal you could have avoided.

If you are thinking of moving from sole trader to a limited company, remember the turnover test then applies to the company and its directors. Our guide to sole trader vs limited company covers the wider pros and cons of that move.

Gross payment status is not permanent. HMRC reviews it each year by checking whether you are still passing the compliance test. You can lose it if, for example, you:

• file tax returns late, such as a Self Assessment, company or CIS return
• pay tax late
• do not supply information HMRC asks for
• give incorrect information or fail to comply with the CIS rules

If the status is removed, contractors start deducting 20% again and you usually have to wait before applying again. The simplest protection is to keep everything on time. Our guide to Self Assessment penalties and appeals explains what happens when deadlines are missed.

If you take on subcontractors yourself, you are a contractor under CIS. Before you pay a new subcontractor, you verify them with HMRC. HMRC then tells you which rate to use: 20%, 30%, or 0% if they have gross payment status. You file a CIS return by the 19th of each month showing what you paid and deducted.

Paying someone gross when HMRC has not confirmed their status can leave you liable for the tax you should have deducted. Our payroll, PAYE and CIS service covers verification and monthly returns.

We support builders and CIS subcontractors at every stage. We check whether you meet the tests, get your filing up to date first if needed, help you prepare the application and then keep your returns and payments on time so you keep the status. If gross status is not right for you yet, we make sure your yearly CIS tax refund is claimed in full and early.

We are led by an ICAEW Chartered Accountant and charge fixed monthly fees, from £99 for sole traders and £150 for limited companies. Book a free 20-minute chat to talk through your options.