If you work in the construction industry, getting the Construction Industry Scheme (CIS) rules right is crucial. Contractors must register for CIS, verify subcontractors, deduct the correct percentage from payments and send monthly returns to HMRC. Getting any part of this wrong can lead to penalties — particularly if the wrong deduction rate is used.
Many subcontractors also don’t realise they can apply for gross payment status, which means they are paid in full with no CIS deductions at all. Understanding when each CIS rate applies can make a big difference to cashflow and compliance.
The standard CIS deduction rates
Under CIS, contractors must deduct tax from payments they make to subcontractors and pay it across to HMRC. The key rates are:
- 20% for registered subcontractors
- 30% for unregistered subcontractors
- 0% for subcontractors approved for gross payment status
These deductions must be sent to HMRC by the 22nd of the month (or the 19th if paying by post). If subcontractors aren’t verified or their registration isn’t up to date, contractors must use the higher 30% rate, which often creates unnecessary cashflow pressure.
What is gross payment status?
Subcontractors are automatically registered for CIS on a net payment basis, meaning deductions will be taken from their payments. Gross payment status removes these deductions completely — allowing subcontractors to receive full payment and handle their own tax liabilities.
To qualify, subcontractors must pass three tests.
The business test
HMRC must be satisfied that the subcontractor is genuinely running a construction business, or is supplying labour for construction work. A valid business bank account is required, and HMRC will check these details when assessing the application.
The turnover test
The turnover requirements vary based on how the business is structured.
For sole traders, turnover (excluding VAT and materials) must exceed £30,000.
For partnerships, each partner must meet the £30,000 test. If there are corporate partners, the threshold is multiplied by the number of relevant persons linked to the company.
For limited companies, the test is also multiplied by relevant persons — including directors and, in close companies, any beneficial owners. If someone is both a director and a shareholder, they only count once.
The compliance test — where many applications fail
The compliance test is strict and is one of the most common reasons HMRC refuses applications. HMRC will reject a gross payment status request if there have been repeated late returns or late payments in the previous 12 months.
HMRC’s guidance makes it clear that late filing of CIS300 monthly returns, VAT returns or Self Assessment returns can all lead to failure. Late Corporation Tax returns also count against the application.
Late payments are treated just as seriously. A single PAYE, VAT or CIS payment of £100 or more that is more than 14 days late will lead to automatic refusal. More than three late payments of £100 or more — even if only a few days late — will also cause the application to fail. Late National Insurance contributions, even once, will result in immediate refusal.
These rules highlight how important good financial systems and consistent compliance are for subcontractors who want to secure gross payment status.
Ongoing reviews of gross payment status
Even after approval, HMRC carries out annual reviews to ensure subcontractors still meet the required standards. If the business fails any of the tests, HMRC will withdraw gross payment status. For companies, HMRC reviews the company as a whole rather than individual directors.
Losing gross payment status can have a huge impact on cashflow, especially for subcontractors working on large contracts, so it’s essential to stay on top of compliance throughout the year.
Is gross payment status worth it?
Gross payment status provides a clear cashflow advantage, allowing subcontractors to keep hold of more of their income throughout the year. It can also help demonstrate that the business is compliant and well-managed, giving a competitive edge when tendering for new contracts.
However, the flip side is discipline. Subcontractors must be organised enough to set aside money for tax payments rather than relying on HMRC to deduct it. Without good financial controls, gross payment status can lead to tax arrears and stress further down the line.
Need help with CIS or applying for gross payment status?
CIS rules can be complex, and the consequences of getting deductions wrong can be costly. Whether you’re a contractor unsure about which rate to apply, or a subcontractor looking to apply for gross payment status, we can help you get it right from the start.
Get in touch with Jon and the team at Jon Davies Accountants for support with CIS compliance, monthly returns, gross payment status applications and staying on the right side of HMRC.
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