If you work as a subcontractor in construction, you’ll be familiar with CIS deductions eating into your payments.
Having 20% taken off every invoice – or 30% if you’re not registered – means you’re constantly waiting to get your own money back through your tax return. For many subcontractors, it’s one of the most frustrating parts of the payment cycle.
Gross payment status offers a way around that. It’s an HMRC designation that allows contractors to pay you the full amount, with no CIS deductions. You still owe the same tax at the end of the year, so it’s not a tax saving in itself, but it means your cash stays in your business instead of sitting with HMRC for months while you wait for a refund.
HMRC doesn’t grant gross payment status to everyone, though. There are three qualifying tests, ongoing annual reviews, and a set of recent rule changes that have raised the consequences of non-compliance.
In this guide, we’ll walk you through everything – what the tests involve, how to prepare, and what’s changed in 2024 and 2026.
What Gross Payment Status Does
Under the Construction Industry Scheme, contractors are required to deduct tax from payments to subcontractors and pass those deductions to HMRC.
The rate depends on your registration status: 30% if you’re unregistered, 20% if you’re registered, and 0% if you hold gross payment status.
Those deductions aren’t your final tax bill – they’re advance payments towards what you owe. Sole traders and partners offset them against income tax and National Insurance through Self Assessment. Limited companies usually reclaim or offset them through their monthly payroll and PAYE processes.
Either way, if more has been deducted than you owe, you’ll get a refund – but it can take a while to come through, and your cash flow takes the strain in the meantime.
With gross payment status, that whole cycle disappears. Contractors pay you in full, you handle your own tax payments directly, and there are no deductions to calculate, report, or chase up on either side.
Some contractors also prefer working with gross payment subcontractors because it acts as a signal that HMRC considers your tax affairs to be in good shape.
The Three Tests You Need to Pass
HMRC assesses gross payment status applications against three criteria, and you’ll need to satisfy all of them. Here’s what each one involves and where people tend to run into problems.
The Business Test
This is the most straightforward of the three, and it’s rare for an application to fail on this alone.
HMRC is looking to confirm that you’re genuinely running a construction business in the UK, that you operate through a bank account, and that you have appropriate records and equipment for the work you carry out. For most established subcontractors, this won’t be an issue.
The Turnover Test
HMRC needs to see that your business is generating enough construction revenue to justify gross payment status.
The measure they use is net construction turnover, which is your gross income from construction work minus the cost of materials and excluding VAT. They’ll look at the 12 months immediately before your application.
The Thresholds
The minimum turnover thresholds depend on how your business is structured, and it’s worth understanding the details here because close companies in particular face an additional requirement.
- Sole traders need at least £30,000 in net construction turnover over the previous 12 months.
- Partnerships need at least £30,000 per partner, or £100,000 for the whole partnership – whichever is lower.
- Limited companies need at least £30,000 per director, or £100,000 for the whole company – whichever is lower. For close companies (controlled by five or fewer people), the per-person requirement extends to beneficial shareholders as well as directors.
To put that in context, a limited company with three directors would need at least £90,000 in net construction turnover. With four or more directors, the threshold caps at £100,000.
New Companies
Because HMRC is looking at the 12 months before the application, newer businesses that haven’t been trading long enough will struggle with this test.
In most cases, it’s better to wait until your first full year of accounts has been filed before applying rather than risk an early rejection.
Exemptions and Alternatives
There are a couple of routes that may apply in less typical situations. Companies wholly owned by a parent that already holds gross payment status don’t need to separately pass the turnover test.
There’s also an “incidental receipts” test designed for businesses whose main activity isn’t construction but who occasionally take on construction contracts – if your total business turnover exceeds the threshold and your construction receipts are incidental, you may still qualify.
The Compliance Test
This is often the test that causes the most difficulty, and it’s the one that demands the most advance preparation. If your tax affairs aren’t in good order, everything else becomes irrelevant.
What HMRC Reviews
The compliance test covers the 12 months before your application date. HMRC will check whether every tax return was filed on time – including Self Assessment, Corporation Tax, VAT, CIS monthly returns, and PAYE RTI submissions – and whether every tax payment reached them by its due date.
How Much Leeway You Get
HMRC does apply a tolerance margin for minor lapses, but it’s narrower than most people expect. During the qualifying 12-month period, they’ll generally overlook the following:
- Up to three late CIS contractor monthly returns, each no more than 28 days late.
- Up to three late VAT returns, each no more than 28 days late.
- Up to three late CIS, PAYE, or VAT payments of £100 or more, each no more than 14 days late.
- Late CIS, PAYE, or VAT payments under £100.
- Any income tax or Corporation Tax Self Assessment return filed no later than 28 days after its due date.
Anything beyond those tolerances will result in a failed application. It’s also worth knowing that any return still outstanding at the point you apply is an automatic failure, regardless of how recent the deadline was. This is why preparation really does need to start a full year before you plan to submit.
Close Companies and Director Checks
For limited companies, HMRC reviews the company’s compliance record rather than individual directors’ personal Self Assessment obligations. However, for close companies, shareholder compliance records may also be taken into account, so issues on the personal side can still affect the company’s application.
Common Mistakes That Sink Gross Payment Applications
Even subcontractors who believe they’re in good shape can get caught out. These are some of the most frequent reasons we see applications turned down:
- Late PAYE RTI submissions. Being even a day late on a Full Payment Submission counts against you, and many businesses don’t realise these are logged automatically by HMRC’s systems.
- Overlooking VAT payments. Every quarterly payment needs to land on time – it’s not enough to keep your CIS and PAYE obligations in order if VAT is slipping.
- Applying too early. Companies that haven’t completed 12 months of trading almost always fail the turnover test. It’s better to wait and apply from a position of strength.
- Outstanding penalties or surcharges. A £100 late filing penalty that slipped your mind still registers as an outstanding payment to HMRC.
If your application is rejected, the path forward is straightforward but requires patience: tighten up your processes, run twelve consecutive clean months, and reapply once you’re confident everything is in order.
Preparing Your Application
It’s worth treating the 12 months before your application as a dedicated qualification period. The compliance test doesn’t leave much room for error, so getting your house in order early makes all the difference.
Building a Clean 12-Month Record
There are a few practical steps you can take to give yourself the best possible chance of passing the compliance test first time round:
- Set up direct debits for every recurring HMRC payment so nothing slips through.
- Diarise every filing deadline and aim to submit at least a week early rather than leaving it to the last day.
- Reconcile your CIS statements monthly to make sure your records match what contractors are reporting to HMRC.
- Check for outstanding liabilities through your HMRC business tax account.
- Resolve any open disputes with HMRC before you apply – unresolved correspondence can slow things down or count against you.
What You’ll Need to Apply
When you’re ready to submit your application, make sure you have the following to hand:
- Your Unique Taxpayer Reference (UTR)
- PAYE employer references
- VAT registration number (if applicable)
- Business bank account details
- Directors’ or partners’ names and National Insurance numbers
- Trading turnover figures for the last 12 months
Keeping It Once You’ve Got It
Qualifying for gross payment status is one thing, but HMRC will continue to monitor your compliance on an ongoing basis. If your record slips, your status can be withdrawn – and the consequences go beyond just losing the 0% rate.
What Triggers a Review
HMRC runs annual compliance checks automatically, but your status can also come under scrutiny outside of that cycle. Your status may be at risk if any of the following apply during the review period:
- Contractor returns have been late on four or more occasions.
- Any single contractor return was more than 28 days late.
- PAYE or CIS payments were late four or more times.
- Any single PAYE or CIS payment was more than 14 days late.
- Any Self Assessment payment was more than 28 days late.
Four or more late contractor returns can trigger an ad hoc review well before your scheduled annual check is due, so it’s important not to assume you have until the next review date to get things back on track.
If Your CIS Status Is Revoked
If you fail a review, HMRC will send a CIS 308 notice giving you 90 days’ warning before removal.
You have 30 days from the date of that notice to appeal in writing, and your status remains in place while the appeal is decided. HMRC does get things wrong from time to time in these reviews, so it’s always worth taking professional advice before accepting a revocation.
If your status is ultimately withdrawn, HMRC notifies every contractor who has paid you in the last two years, which carries reputational consequences in addition to the cash flow impact. You’ll revert to the standard 20% deduction rate, and in ordinary cancellation cases, the wait to reapply is generally one year.
Recent CIS Reforms: 2024 and 2026
There have been two rounds of reform in quick succession that affect gross payment status, and it’s important to understand what changed and when, because some of the rules now in force are considerably stricter than what came before.
April 2024 Changes
From 6 April 2024, HMRC added VAT obligations to the compliance test for gross payment status and extended its immediate cancellation powers to cover cases involving VAT, Corporation Tax, income tax, and PAYE fraud.
This means VAT compliance is now just as critical as CIS and PAYE compliance when it comes to both qualifying for and retaining your status.
April 2026 Changes
The April 2026 reforms went further still. HMRC can now remove gross payment status with immediate effect – bypassing the usual 90-day notice period – where it believes a business knew or should have known that a payment was connected to fraud. It can also assess the business for the associated tax loss and impose penalties of up to 30%.
Where gross payment status is immediately removed under these fraud or serious non-compliance powers, the reapplication waiting period jumps from one year to five. This doesn’t apply to ordinary cancellations, but the consequences for those caught by it are severe.
Mainstream contractors should also note that, from April 2026, nil CIS returns are required again in any month in which no subcontractor payments are made, unless HMRC has been notified of a dormant period of up to six months.
How Double Point Can Help
A single overlooked deadline can mean waiting a full year before you’re eligible to reapply – or five years if HMRC considers it a serious compliance failure.
At Double Point, our chartered accountants help construction businesses through every stage of the gross payment status process, from building a clean compliance record to managing the application and making sure you keep your status long-term.
Book a free consultation with us today and we’ll let you know exactly where you stand.