Gross payment status is worth more to a construction business than almost any other line in its tax affairs. It decides whether you receive your invoice in full or hand 20% of the labour element to HMRC months before you actually owe it. From 6 April 2026, HMRC can cancel it immediately, keep it withdrawn for five years, and do so because of what a company further down your supply chain did. This guide covers how gross payment status works, how you qualify, how you lose it, and what the new rules changed.
What is CIS gross payment status?
Under the Construction Industry Scheme, a contractor deducts 20% from a registered subcontractor’s payments and passes it to HMRC. The rate rises to 30% if the subcontractor has not registered, or if the contractor cannot verify them. Those deductions are advance payments towards the subcontractor’s tax and National Insurance, not extra tax.
Gross payment status sets that rate to 0%. You invoice, you get paid in full, and you settle your own tax through Self Assessment or your Corporation Tax return at the normal time. Nothing about the amount of tax changes. What changes is when the money leaves your bank. In a trade where cash lands sixty to ninety days after the work, that timing decides whether you fund the next job or borrow to fund it.
Who qualifies for gross payment status?
Short answer: businesses that pass three tests — compliance, business and turnover — and run their construction work through a bank account.
HMRC needs to see three things. You must have paid your tax and National Insurance on time in the past. Your business must carry out construction work in the UK, or supply labour for it, and must run through a bank account.
The turnover test looks at your last 12 months, ignoring VAT and the cost of materials. A sole trader needs £30,000. Partnerships need £30,000 for each partner, or at least £100,000 overall. For a company it is £30,000 for each director, or at least £100,000 overall. Where five people or fewer control a company, HMRC expects £30,000 for each of them.
How do you apply for gross payment status?
Short answer: by online or postal application to HMRC, which also registers you for CIS if you have not registered already.
The form depends on whether you trade as a sole trader, a partnership or a limited company. Giving false information on the application carries a penalty, and so does helping someone else to make a false registration.
After HMRC grants it, the status comes up for review every year. HMRC checks whether your returns and payments arrived on time, and reviews a limited company as a company rather than through its individual directors or shareholders. Small slips will not cost you the status. A pattern will.
Why does HMRC normally remove gross payment status?
Short answer: because you failed the annual review, usually through late returns or late payments.
The ordinary route gives you warning. HMRC writes to say you are about to fail the review and sets out the reasons. You can write back and explain. If HMRC accepts the explanation, nothing happens. If it does not, a second letter confirms which conditions you missed and states that your gross payment status will be withdrawn in 90 days. You then have 30 days from the date of that letter to appeal.
That timetable matters. Ninety days is long enough to tell your main contractors, reprice the work in front of you and arrange funding for the gap. Contact HMRC early if you cannot pay on time, because a time-to-pay arrangement agreed in advance does not affect your gross payment status. Ignoring the letter does.
What changed for gross payment status on 6 April 2026?
Short answer: HMRC gained the power to cancel gross payment status immediately, with no 90-day notice, and to bar reapplication for five years.
New CIS fraud measures took effect on 6 April 2026. They bite where a business pays for construction operations, or claims a CIS credit in a return. The test is whether that business knew, or should have known, that the payment or credit was connected to deliberate non-compliance by another party.
Where those conditions are met, HMRC can do four things. It can determine that the business must pay 20% of the payment it made. A penalty of up to 30% of that determination can follow. Cancellation of gross payment status takes immediate effect. And where a company is involved, HMRC can transfer the penalty to a company officer personally.
On a £100,000 payment, the determination is £20,000 and the penalty can add up to £6,000 on top. The penalty applies to payments made or credits claimed after 6 April 2026.
Can HMRC take your gross payment status because of someone else’s fraud?
Short answer: yes. The new rules turn on what you knew or should have known about another party’s deliberate non-compliance, not on your own filing record.
This is the part that catches people. The connected party can be another party to the contract your payment relates to, or a party to a different construction contract covering the same construction operations. So a failure two or three links away from you can still reach you.
Your own returns can be immaculate and your own tax paid on the day. You can still lose gross payment status because a labour supplier in the chain deliberately failed to deduct or pay over CIS or PAYE. HMRC does not have to show that you took part. It has to show that you knew, or that you should have known.
What does “should have known” actually mean?
Short answer: it is an objective test — whether a reasonable business would have concluded that the only reasonable explanation for the transaction was a connection to deliberate non-compliance.
HMRC states plainly that the phrase is not defined in legislation and that the test is objective. Direct evidence that someone knew is rare. HMRC can instead infer actual knowledge from the circumstances surrounding how the payments were made.
“The only reasonable explanation” does not mean no other explanation exists. It means no other reasonable one does, judged against the evidence. HMRC’s own guidance puts it bluntly: if a deal looked too good to be true, you should have walked away or carried out a more thorough risk assessment. Carrying on regardless is treated as having known.
Knowledge is assessed across the whole business, not just the boardroom. HMRC considers what directors, the company secretary, employees in any capacity, and third parties such as agents and advisers knew about the transactions.
Which supply chain warning signs does HMRC expect you to spot?
Short answer: HMRC publishes a list of indicators, and several of them describe arrangements that many contractors currently treat as normal.
HMRC sets these out in its own guidance on the measures. No single one proves anything. A combination builds the case against you.
- Unsolicited approaches from organisations with little or no history in construction.
- Directors with no construction experience.
- Payroll companies or agencies with no physical or online presence.
- Repeat deals at the same or lower prices, with suspiciously consistent profit.
- Instructions to pay third parties or offshore, or the use of alternative banking platforms.
- Invoices sharing an identical template across different suppliers, or carrying incorrect tax references or mismatched bank details.
- Prices below realistic labour cost.
- No formal contracts despite high-value deals, and no insurance.
- Excessive layers of subcontracting, where the labour rate only works if the tax is never paid.
- Frequent changes of subcontractor entity supplying the same labour, where previous entities defaulted or went missing.
Read that list again as a contractor rather than as an accountant. The last two describe a labour supply market that a great many firms use without a second thought.
Can a director be made to pay the CIS penalty personally?
Short answer: yes. HMRC can issue a notice making a company officer jointly liable with the company for part or all of the penalty.
The condition is that the company’s actions giving rise to the penalty were attributable to that officer. HMRC applies the same “knew or should have known” test to the individual, using only the information and understanding that person held.
“Officer” reaches further than most people assume. It covers directors, managers, company secretaries and shadow directors, members of an LLP exercising management functions, and shadow members. A manager acting purely under instructions is an officer but would not usually be a suitable target.
There is a defence, and it is worth understanding. HMRC’s guidance accepts that a director may reasonably not know. That is most likely where they play no part in agreeing contracts, reasonably trust another officer to do that work well, and see nothing in the results to arouse suspicion. Directors are also expected to intervene once they do know. Agreement counts, even where someone else set the arrangement up.
How long before you can reapply for gross payment status?
Short answer: one year after an ordinary cancellation, but five years where HMRC cancels under the new fraud power.
This is the single biggest change and it is widely reported imprecisely. Where gross payment status is cancelled through the normal annual review route, you wait a year from the date of cancellation before reapplying. Where HMRC cancels under the new fraud provision, you cannot reapply for five years, beginning with the day the cancellation takes effect.
Five years at 20% deducted from every labour invoice is not a compliance inconvenience. For most subcontracting businesses it is a different business model, and for some it is the end of the business.
You can appeal the cancellation. Notice of appeal must state the grounds, must be in writing, and must reach HMRC within 30 days of the cancellation. Separately, HMRC cannot issue the penalty more than three years after the related determination became final.
What does losing gross payment status do to your cash flow?
Short answer: every labour invoice drops by 20% on the day it is paid, while your own costs carry on at 100%.
Wages still leave weekly. Materials are still due on thirty days. Your application for payment still goes through certification and revision before anything arrives, and retentions still sit unpaid for a year after completion. Take a fifth off the top of every receipt and the gap has to be funded from somewhere.
You do not lose the money. It sits with HMRC as an advance payment against your tax, and any excess comes back to you. Sole traders reclaim through Self Assessment. Limited companies offset against PAYE liabilities and claim the remainder after the tax year ends. The timing, though, is the whole problem, and refunds arrive far too late to pay a subcontractor in week three.
How do you protect your gross payment status?
Short answer: file and pay on time, and keep documented evidence of the due diligence you carried out on everyone you pay.
The compliance basics have not changed. Monthly CIS returns must reach HMRC by the 19th and payment is due by the 22nd. Each subcontractor needs a payment and deduction statement within 14 days of the tax month end. File a nil return in months you paid nobody, or make an inactivity request, which lasts up to six months and can be renewed. Late filing penalties start at £100 on day one, reach £200 at two months, and rise to £300 or 5% of the deductions at six and twelve months. Beyond that HMRC can charge up to £3,000 or 100% of the deductions.
What has changed is the second half. HMRC explicitly weighs the due diligence and risk assessment a business carried out when deciding whether it should have known. That turns your supplier file into evidence rather than admin. Verify every subcontractor before you pay them. Check that the entity invoicing you is the entity doing the work, and question labour rates that cannot support the tax. Then write down what you checked and when.
Our own view, having run CIS returns for contractors for years, is that most firms will pass the filing test and fail the evidence one. Nobody keeps a record of the checks they did on a labour agency two years ago. Under these rules, that record is the defence.
Frequently asked questions
Does losing gross payment status mean I pay more tax?
No. CIS deductions are advance payments towards your tax and National Insurance, so the total you owe is unchanged. Losing gross payment status changes when the money leaves your business, not how much of it HMRC keeps.
Can I appeal the cancellation of gross payment status?
Yes. You must give notice of appeal in writing, state your grounds, and get it to HMRC within 30 days of the cancellation. Where the cancellation follows a failed annual review, the 30 days run from the date of HMRC’s letter confirming the withdrawal.
Do I have to file a CIS return in a month when I paid nobody?
Yes, unless you have told HMRC otherwise. File a nil return, or make an inactivity request covering up to six months, which you can renew. Doing nothing triggers an automatic £100 penalty, and repeated late returns put gross payment status at risk.
Can new shareholders affect my gross payment status?
Yes. You must tell HMRC when you add new shareholders, and HMRC may withdraw gross payment status if you do not do so within 30 days. Changing business structure means reapplying, because the registration cannot transfer from the old entity.
We act for construction businesses across Harpenden, St Albans and Hertfordshire, from sole trader subcontractors to firms running several sites. Have you had a letter from HMRC about your gross payment status, or a determination or penalty notice under the new rules? Send it to us. We will tell you what it means, and what the deadlines are, before you reply to it.
