CIS Tax Exemption: The Three Tests for Gross Payment Status

Gross payment status under the Construction Industry Scheme (CIS) lets contractors pay you in full, with no 20% tax deduction taken at source. To get it, you apply to HMRC and pass three tests covering your business, its turnover, and your tax compliance record. Once granted, the status is reviewed every year, and staying clean on filings and payments is what keeps it in place.

Without the status, a CIS-registered subcontractor loses 20% of the labour portion of every invoice to HMRC and reclaims it later through a tax return. For a business turning over several hundred thousand pounds a year, that gap in working capital is the whole reason to apply.

The Three Tests You Have to Pass

HMRC assesses every application against a business test, a turnover test, and a compliance test. You need all three.¹

Business Test

You must be doing construction work (or supplying labour for it) in the UK, and running the business through a bank account.¹ A personal savings account won’t do; it has to be a business account that your construction income and expenses actually flow through.

Compliance Test

This is where most applications fail. HMRC looks at the 12 months before your application and checks that every tax obligation was met on time. For sole traders, that covers:

Self-assessment returns filed by the deadline
CIS returns filed and deductions paid on time, if you also operate as a contractor
VAT returns and payments on time, if you’re VAT-registered
PAYE and National Insurance on time, if you employ staff
Your own personal National Insurance contributions kept current

You also need to have complied with any HMRC request for accounts or information during that period.² Companies are held to the same standard, and the scrutiny extends to each director and, in close companies, to each beneficial shareholder.³

There is one small tolerance. An individual late payment of £99.99 or less for PAYE, VAT, or CIS deductions is treated as meeting the test.² Anything above that, even by a day, is a problem. HMRC also has to be satisfied that you’ll keep complying going forward, so a pattern of last-minute payments weakens the application even if nothing quite tipped over the line.

Turnover Test

The turnover test measures net construction turnover across the 12 months before you apply. “Net” here means gross construction income minus VAT and the cost of any materials you supplied. Only the labour and professional-services portion counts.¹

The thresholds depend on your structure:

Sole trader: at least £30,000 net construction turnover
Partnership: at least £30,000 per partner, or at least £100,000 for the whole partnership
Limited company: at least £30,000 per director, or at least £100,000 for the whole company
Close company: at least £30,000 per director and per beneficial shareholder

The £100,000 whole-business alternative helps partnerships and companies where turnover isn’t spread evenly across the partners or directors.⁴ For close companies (those controlled by five or fewer people), the per-person £30,000 test applies to beneficial shareholders as well as directors, and the £100,000 alternative isn’t available for that group.¹

Bookkeeping matters here because HMRC wants to see the calculation, not just the final figure. Materials costs and labour income need to be separated in your records. If your numbers are borderline, a poorly documented deduction for materials can push you under the threshold.

Applying to HMRC

You can apply online or by post. Either route also registers you for CIS if you aren’t already.¹ The paper form depends on your business type:

Have your Unique Taxpayer Reference (UTR) to hand, and your National Insurance number if you’re a sole trader or partner. Partnerships supply details for each partner, including individual UTRs and National Insurance numbers.⁶ Companies need the company UTR and company registration number. The forms ask for a detailed breakdown of the last 12 months of gross construction income, materials costs, and the resulting net figure, so pull those numbers together before you start.⁸

Once approved, contractors who verify you through the CIS online service get a “matched — gross” result and pay you the full invoice with no deduction.

Keeping the Status After You Get It

HMRC reviews your business every year to decide whether the status stays.⁹ The compliance test runs again: returns on time, liabilities paid, information requests answered. For limited companies, the review looks at the company itself rather than individual directors or shareholders.

If a failure is heading your way, HMRC writes with the reasons and gives you a chance to explain. If your explanation isn’t accepted, a further letter confirms that gross payment status will be withdrawn in 90 days.⁹ After cancellation you revert to 20% deductions, and you cannot reapply for one year from the cancellation date.¹⁰

Where HMRC suspects fraud or a deliberately false application, cancellation takes effect immediately with no 90-day notice.¹⁰

Reasonable Excuse for a Missed Deadline

A single missed deadline doesn’t always sink an application or existing status. HMRC will consider a “reasonable excuse,” provided you corrected the failure without unreasonable delay once the excuse no longer applied.¹¹

Situations HMRC has accepted include the death of a partner or close relative, an unexpected hospital stay, postal disruption from strikes, floods, or fires (especially with a certificate of posting sent in good time), HMRC online service failures or late activation PINs, fire, flood, or theft that destroyed records, and computer failure just before or during preparation of an online return.¹¹

None of these are automatic passes. Each case is judged on its own facts, and falling into one of the categories doesn’t guarantee acceptance. The strongest claims come with clear documentation and a swift correction once the obstacle was removed.

Appealing a Refusal or Cancellation

If HMRC refuses your application or cancels your status and you think the decision is wrong, you have 30 days from the date of the decision letter to appeal. You can ask HMRC for an internal review, or take the appeal straight to the tax tribunal.¹²

If the internal review upholds HMRC’s decision and you still disagree, you get another 30 days from the review conclusion to notify the tribunal. Miss either window and the decision stands.¹² The clock is tight, so don’t sit on a decision letter you plan to challenge.

One VAT Point to Watch

Gross payment status handles the CIS side of your invoicing, not the VAT side. If you’re VAT-registered, most construction services reported under CIS fall under the VAT domestic reverse charge when both parties are VAT-registered and the customer hasn’t confirmed end-user status in writing. Under that rule, the customer accounts for VAT rather than you, and your invoice notes that the reverse charge applies while still showing the VAT rate and amount that would otherwise be due.¹³ Confirm your customer’s VAT and CIS status before invoicing so the paperwork lines up on both sides.