If you run a construction limited company on standard CIS deductions, every invoice you raise has 20% lopped off at source by your contractor and paid to HMRC. You get the rest. The deduction is offset against your PAYE bill each month and any surplus comes back as a refund after the year-end. We covered the refund mechanism in detail last week.
Gross payment status is the alternative. With it, contractors pay your invoices in full. You still owe corporation tax, PAYE and VAT in the normal way, but you receive your money first and pay your tax later. For a construction Ltd company turning over £80,000 of net labour, the cash freed up at any point in the tax year usually exceeds £8,000. For larger operators it scales linearly.
The catch is that HMRC does not hand it out for the asking. There are three tests, and the application process is unforgiving. This post explains what each test actually requires, how to apply, the most common reasons applications get refused, and how to keep the status once HMRC grants it.
Why gross payment status matters.
The CIS deduction is not a cost. The money comes back. But it comes back slowly, and in the meantime it is not in your bank account. Three things follow from that:
- Working capital. A construction Ltd subbie under standard CIS deductions runs with a permanent £5,000–£20,000 chunk of working capital sitting at HMRC. With gross payment status, that chunk lives in the company bank account where it can fund payroll, materials, plant or simply provide a buffer.
- Year-end refund risk. Refund claims get stuck. We see refunds delayed for six to ten months when contractor records do not match company records. Gross payment status removes the dependency on contractor record-keeping entirely.
- Pricing power. Some larger main contractors prefer to engage subcontractors with gross payment status because it removes their administrative burden of running the deductions through CIS300. It can quietly tilt tender decisions.
The downside is that HMRC monitors gross payment status holders closely. Lose it once and getting it back takes another twelve clean months.
The three tests — what each one actually requires.
1. The business test.
The company has to operate a genuine construction business in the United Kingdom, with bank accounts in the company name, proper invoicing and proper records. HMRC is checking that the entity in front of them is a real construction operation, not a paper company set up to capture an existing sole-trader CIS arrangement.
In practice the business test is the easiest of the three to pass. If the company is genuinely trading, has a business bank account, raises VAT-compliant invoices and keeps accounting records, this test is met. The applications that fail at this stage are usually shell companies or companies where the construction work is being done personally by the director outside the company structure.
2. The turnover test.
The company has to evidence net construction turnover, excluding VAT and the cost of materials, of at least:
- £30,000 per relevant person — for limited companies, that means £30,000 multiplied by the number of directors. A single-director Ltd needs £30,000. A two-director Ltd needs £60,000.
- Or £100,000 in total, regardless of how many relevant persons.
The figure is net of materials. If you invoice £45,000 and £15,000 of that is materials charged through, the construction turnover for the test is £30,000 not £45,000. Most subbies invoice labour and materials together; the test looks at the labour element alone.
Turnover is evidenced from the company's accounts, the VAT returns, and the contractor CIS payment statements. It needs to be twelve consecutive months of trading. Newly incorporated companies usually fail the turnover test simply because they have not been trading long enough; in that case it is worth waiting until the first full year of accounts is filed before applying.
3. The compliance test.
This is where most applications fall over. The compliance test requires that, in the twelve months immediately before the application:
- Every PAYE Real Time Information submission (FPS and EPS) was filed on time
- Every VAT return was filed on time
- Every corporation tax return due in the period was filed on time
- Every self-assessment return for each director was filed on time
- Every tax payment due was paid on time — PAYE/NIC monthly, VAT quarterly, corporation tax nine months and a day after the year-end, self-assessment by 31 January
- The company has not been the subject of a current HMRC enforcement action
HMRC allows a small number of minor lapses. As of the current published guidance, a single PAYE payment up to fourteen days late, three PAYE filings up to fourteen days late, and one self-assessment return up to twenty-eight days late will not by themselves cause a refusal. Anything beyond that — one corporation tax payment a day late, or a VAT return a week late — is almost certainly enough to fail the test.
The fix when an application fails on compliance is uncomfortable: tighten everything up, run twelve consecutive clean months, then reapply. There is no shortcut.
How to apply.
The application route depends on whether the company is already CIS registered as a subcontractor.
- If already registered for CIS as a subcontractor — apply online through your business tax account on the HMRC CIS service, or by phone to the CIS helpline (0300 200 3210), or by post using form CIS304 for limited companies.
- If not yet CIS registered — the gross payment status election can be made at the point of CIS subcontractor registration. The same three tests apply.
The application asks for the company UTR, the PAYE references, the VAT registration number, the company bank account, the directors' names and National Insurance numbers, and the trading turnover figures. HMRC will pull the compliance record from internal systems, so you do not need to supply it — but if you know there are slips in the previous twelve months, expect a refusal.
Decisions usually arrive within four to eight weeks. If granted, the status takes effect from a date HMRC specifies in the letter, and contractors must verify the company through their CIS service before paying gross. If refused, the letter explains which test was not met. There is a right of appeal within thirty days, but in most cases the better route is to fix the underlying issue and reapply once you have twelve fresh clean months on the record.
Keeping the status once granted.
HMRC carries out an annual compliance review on every gross payment status holder. The review runs the same compliance test, looking at the previous twelve months. The thresholds for losing status are tighter than the thresholds for getting it: a small number of lapses can be enough.
If the review fails, HMRC issues a notice of intention to remove gross payment status. The company has thirty days to appeal. If the appeal fails, status is removed and the company drops back to 20% CIS deductions on every invoice. From that point HMRC will not consider a fresh application until twelve more clean months have been completed.
The practical implication is that gross payment status raises the cost of administrative slips. A late VAT return that was a £100 fine under standard CIS becomes a status-loss risk under gross. The only sensible way to hold the status is to run a tight monthly process: every PAYE, VAT, CT and SA return filed days before the deadline, every payment scheduled out the door on time.
What good looks like in practice.
For a Barton client running a construction Ltd company, the gross payment status workflow looks like:
- Twelve-month preparation. Before applying, we run twelve consecutive months of clean filings and clean payments. If there is a slip, we restart the clock. We use the time to get Xero set up, CIS bills and CIS sales tracking switched on, and direct debits in place for VAT and corporation tax to remove the human-error risk.
- Application. We submit the CIS304 once the twelve clean months are in the bag. We make sure the turnover figures match the filed accounts and VAT returns to the penny.
- Notification to contractors. Once granted, we send a short note to every active contractor confirming the company is now on gross payment status, with effect from the HMRC start date. Contractors will reverify the company through CIS Online and stop deducting tax from the next invoice.
- Ongoing discipline. Filings and payments continue exactly as before. Monthly bookkeeping, monthly payroll, quarterly VAT, annual accounts and corporation tax all run on schedule. The annual HMRC review then becomes a non-event.
The result is a construction Ltd company that holds onto its full invoice value, runs with materially better working capital, and never has to chase HMRC for a year-end refund again.
Ashby, Swadlincote, Burton, Coalville — local construction practice.
Construction CIS is a heavy presence across our patch — Ashby-de-la-Zouch, Swadlincote, Burton upon Trent, Coalville, Woodville, Church Gresley and the surrounding villages. We act for groundworkers, electricians, joiners, plasterers, scaffolders, roofers and general builders running through limited companies. Gross payment status applications, the twelve-month preparation that goes with them, and the ongoing compliance discipline that keeps the status are routine work for the firm.
If your construction Ltd company is approaching twelve months of clean trading, or has already passed it, the gross payment status conversation is worth having now. Talk to us and we will tell you whether the company is ready to apply, and what tightening up needs to happen if it is not.
Gross payment status is not a tax saving. It is a working-capital release. The same total tax is paid in the end — you just keep your own money in your own bank account in the meantime.
Frequently asked questions
What is CIS gross payment status?
An HMRC designation under the Construction Industry Scheme that lets contractors pay your company in full without the 20% CIS deduction. You still owe the same total tax — you just receive the cash first.
What are the three tests for CIS gross payment status?
The business test (genuine construction business, company bank account, proper invoicing), the turnover test (£30,000 per director or £100,000 total of net construction turnover) and the compliance test (twelve consecutive months of on-time PAYE, VAT, CT and SA filings and payments).
How do I apply for gross payment status?
Online through your business tax account, by phone to the CIS helpline (0300 200 3210), or on form CIS304 for limited companies. HMRC pulls the compliance record from its own systems. Decisions take four to eight weeks.
Can HMRC remove gross payment status?
Yes. HMRC reviews compliance annually. A small number of late filings or late payments can trigger removal, putting the company back on standard 20% CIS deductions. A right of appeal exists, but the safer route is to keep filings and payments on time consistently.