CIS gross payment status: how to qualify and what can put it at risk

If you work as a subcontractor in the construction industry, the Construction Industry Scheme can have a big effect on your cash flow.

Under CIS, contractors usually make deductions from subcontractor payments and pass the money to HMRC. These deductions count towards the subcontractor’s tax and National Insurance.

However, some subcontractors can apply for CIS gross payment status. This means contractors pay them without making CIS deductions.

That can have a significant impact on cash flow.

Even so, gross payment status is not automatic. You must meet HMRC’s conditions when you apply. You must also continue to meet them once HMRC grants the status.

What is CIS gross payment status?

CIS gross payment status allows contractors to pay a subcontractor in full, without making CIS deductions from their payments.

For CIS purposes, the usual deduction rates are:

• 20% for registered subcontractors
• 30% for unregistered subcontractors
• 0% for subcontractors with gross payment status

This does not mean the subcontractor pays no tax. It simply means tax is not withheld from each payment under CIS.

The subcontractor still needs to declare the income and pay the tax due. A sole trader or partner will usually do this through Self Assessment. A limited company will include the income in its Corporation Tax return.

Why might a subcontractor want gross payment status?

The main reason is cash flow.

If contractors make CIS deductions from a subcontractor’s payments, part of the money is withheld before it reaches the business.

Some businesses can manage this. However, it can be difficult for subcontractors with regular labour costs, materials costs, plant hire, insurance and other overheads.

Gross payment status can help your business keep more cash in the bank during the year.

This can be useful if your business needs to:

• Pay staff and subcontractors
• Buy materials before being paid by clients
• Cover VAT bills and other tax payments
• Manage larger contracts
• Be less reliant on short-term borrowing

However, gross payment status also brings responsibility.

Because tax is not being withheld from payments during the year, your business must plan carefully for its upcoming tax bills.

Who can apply for CIS gross payment status?

Sole traders, partnerships and limited companies can apply for gross payment status.

You can apply when you register for CIS. You can also apply later if you are already registered as a subcontractor.

HMRC will not grant gross payment status just because a business asks for it. Your business must pass three tests: the business test, the turnover test and the compliance test.

These tests are designed to show that the business is genuinely operating in construction, has enough qualifying turnover and has a good record of meeting its tax obligations.

The business test

The business test looks at whether your business genuinely carries out construction work – or provides labour for construction work – in the UK.

Your business must also operate through a bank account.

In practice, HMRC is checking that your business genuinely carries out construction work in the UK and that its qualifying construction turnover is high enough. It is not enough to have general business income – or occasional construction-related work – if the turnover does not meet the gross payment status rules.

The turnover test

The turnover test looks at your business’s net construction turnover.

Net construction turnover – not total sales – means income from construction work, excluding VAT and the cost of materials.

The minimum turnover depends on how a business is structured:

• Sole traders need a net construction turnover of at least £30,000.
• Partnerships can qualify with £30,000 for each partner, or £100,000 for the partnership as a whole.
• Companies can qualify with £30,000 for each director, or £100,000 for the company as a whole.

If five people or fewer control a company, it must have an annual turnover of at least £30,000 for each of them.

This is an area where the details matter.

Your business may have a healthy total income but still need to check whether enough of that income counts as net construction turnover for the test.

The compliance test

The compliance test looks at whether the business has kept its tax affairs up to date.

This can include returns and payments for taxes such as:

• Self Assessment
• Corporation Tax
• PAYE
• VAT
• CIS obligations, where relevant

VAT returns and payments now form part of the compliance picture. Late filings or missed payments can therefore count against a business when HMRC decides whether to grant or keep gross payment status.

HMRC may allow some minor non-compliance. However, gross payment status depends on the business having a strong record of filing returns and paying tax on time.

What information might you need when applying?

The exact information depends on whether you apply as a sole trader, partnership or limited company.

However, you may need details such as:

• Your Unique Taxpayer Reference
• Your National Insurance number, if you are a sole trader
• VAT details, if applicable
• Turnover for the last 12 months
• Evidence of turnover, such as invoices, bank statements and payment statements
• Bank account details
• PAYE details, if applicable

It is important to use accurate figures.

HMRC can ask for evidence. You may also face a penalty if you provide false information.

What can put CIS gross payment status at risk?

Getting gross payment status is only the first step. A business also needs to keep it.

HMRC reviews businesses with gross payment status. If your business no longer meets the conditions, HMRC can remove the status.

Common risks include:

• Late tax returns
• Late tax payments
• Missed VAT deadlines
• Problems with CIS monthly returns
• Unpaid PAYE or CIS deductions
• Inaccurate turnover figures
• Poor record keeping
• Failing to report relevant business changes

If HMRC removes gross payment status, your business will usually have to wait before applying again. The exclusion period normally lasts 12 months from the date the gross payment status is removed.

In the meantime, contractors will need to make CIS deductions from payments.

Why cash flow planning still matters

Gross payment status can improve cash flow, but it can also create a trap.

When contractors make CIS deductions, some tax is effectively paid as the year goes on. When a business is paid gross, that does not happen.

The business receives more cash upfront. However, it must still put money aside for tax.

This makes cash flow planning especially important.

A business with gross payment status should keep proper records, monitor future tax liabilities and avoid treating gross receipts as if they are all available profit.

How an accountant can help

An accountant can help you understand whether CIS gross payment status is realistic for your business.

This may include checking:

• How close the business is to meeting the turnover test
• Whether construction income has been calculated correctly
• VAT, PAYE, Corporation Tax or Self Assessment records
• Supporting evidence for the application
• Likely effects on cash flow and future tax bills

Good records and tax processes will strengthen the business beyond any single HMRC application

Need help with CIS gross payment status?

CIS gross payment status can be useful for construction subcontractors, but it needs to be handled carefully.

To qualify, you need to meet HMRC’s business, turnover and compliance tests. To keep the status, you need to stay on top of tax returns, payments and records.

If you are thinking about applying, or you are worried about keeping your CIS gross payment status, we can help you review your position and understand the next steps.

Speak to a member of the team today on 0800 6520 025 or contact us using the form below.