How do I apply for gross payment status? A step-by-step guide for subcontractors

Want your application checked before it goes in? Our CIS accountants can check it for you.

CIS gross payment status means contractors pay you in full, with no deduction, instead of the 20% taken under net payment status. You still pay exactly the same tax at the end of the year. The difference is that you hold the cash in the meantime rather than HMRC.

Do you qualify for gross payment status?

There are three tests, business, turnover and compliance, and you have to pass all of them.

The business test. Your business carries out construction work, or supplies labour for it, in the UK, and is run to a substantial extent through a bank account.

The turnover test. Ignoring VAT and the cost of materials, your turnover in the last 12 months must be at least:

• £30,000 if you are a sole trader.
• £30,000 for each partner, or £100,000 for the partnership as a whole.
• £30,000 for each director, or £100,000 for the company as a whole, whichever is lower.

If the company is a close company (broadly, one controlled by five or fewer people, which covers most owner-managed companies), each beneficial shareholder counts as well as each director. Each person is counted once, and HMRC uses the highest number at any one time in the 12 months. A sole director who owns shares alongside two other shareholders therefore needs £90,000, and a close company with four or more such people needs £100,000 (FA 2004 Sch 11 para 11; SI 2005/2045 reg 28).

The compliance test. Over the 12 months before you apply, you have filed your returns and paid your tax and National Insurance on time, and answered any HMRC request for accounts or information about the business. HMRC must also have reason to expect you to keep doing so.

What does the gross payment status compliance test cover?

This is where most applications fail, and the VAT change in April 2024 made it harder to pass.

Since 6 April 2024, VAT compliance forms part of the test. Before then, HMRC looked at CIS, PAYE, Self Assessment and Corporation Tax; now VAT counts too. If you are VAT registered, HMRC looks at whether your VAT returns went in on time and whether the liabilities were paid.

There are tolerances. HMRC will overlook up to three CIS returns filed up to 28 days late, up to three VAT returns filed up to 28 days late, and Self Assessment or Corporation Tax returns filed no more than 28 days late. On payments, it will overlook up to three late payments of £100 or more for each of CIS deductions, PAYE and VAT, provided none was more than 14 days late, and it ignores late payments of CIS deductions, PAYE or VAT under £100. Any late payment of National Insurance contributions counts against you, whatever the amount, as does any CIS, VAT, Self Assessment or Corporation Tax return still outstanding on the day you apply. A failure outside these limits can still be disregarded if you had a reasonable excuse.

How do you apply for gross payment status?

1. Check you pass all three tests (business, turnover and compliance) over the last 12 months.
2. Gather evidence of turnover: bank statements, payment and deduction statements, invoices and contracts.
3. Apply online through HMRC’s CIS service with your Government Gateway user ID, or by post on form CIS302 (sole trader), CIS304 (partnership) or CIS305 (limited company).
4. For a company, give the company UTR, current turnover, bank details, and the name, address, UTR and National Insurance number of every director and person with significant control.
5. Answer any questions HMRC raises on turnover or compliance promptly.
6. Once HMRC confirms gross payment status, it writes to the contractors you already work for. Check that each one has updated its records before its next payment run, and give any new contractor your details so it can verify you.

How do you keep gross payment status? The annual review

Gross payment status is not granted once and forgotten. HMRC runs an automatic review, the Tax Treatment Qualification Test, once in every 12-month period. The date is selected at random and HMRC will not tell you when it is coming. HMRC can also bring a review forward, for example where the business has compliance failures, where it also acts as a contractor and has filed four or more monthly CIS returns late in the last 12 months, where it becomes insolvent, or where a linked registration such as a partnership in which you are a partner loses gross payment status.

If HMRC thinks you are about to fail, it writes to you first and explains why. You can reply with your reasons, and if HMRC accepts them your status stays. If you do not reply, or HMRC does not accept your explanation, it issues form CIS308 and you lose gross payment status 90 days later. You have 30 days from the date of that letter to appeal. If you have not appealed by day 55, HMRC writes to every contractor who has paid or verified you in the last two years to tell them to deduct tax from day 90. Once status is cancelled this way, you cannot reapply for a year.

What should you do next?

Check your last 12 months of filing and payment history before you apply, not after. Pull your VAT account, your CIS returns and your PAYE position and look at them the way an HMRC officer would.

That is the part most firms skip. We do not. Our team includes Chartered Tax Advisers and professionals who have worked inside HMRC, so we know which failures HMRC waves through and which ones end an application. We would rather wait until any late filings have dropped out of the 12-month period HMRC looks at, then apply with a clean record, than apply now and be refused.

If you want to know where you stand, talk to a Chartered Tax Adviser rather than an adviser who only files the form. You can also read more about how we support contractors and subcontractors on our Construction Industry Scheme page, or on our page for construction and property businesses, and see how this played out for a real client in our case study on keeping gross payment status after an HMRC supply chain enquiry.