A bricklaying firm in Barnsley turns over £480,000 a year, most of it labour. Under the Construction Industry Scheme, its contractors deduct 20% from the labour element of every payment and send it to HMRC. On a £30,000 month with £24,000 of labour, that is £4,800 leaving the business before it arrives.
The firm gets it back eventually, set against its corporation tax and PAYE, with any excess repaid after the year end. Eventually is the problem. The money is gone in March and back in the following November, and in the meantime the wages still have to be paid on Friday.
The deduction is a payment on account, not a tax
Under the Construction Industry Scheme, a contractor paying a subcontractor for construction work has to verify that subcontractor with HMRC and deduct at the rate HMRC returns: 30% if the subcontractor is not registered or cannot be matched, 20% if registered for payment under deduction, and nothing at all if they hold gross payment status.
The deduction is taken from the labour element only. Materials, plant hire paid for by the subcontractor, fuel other than for travel, and the VAT element are all excluded, provided the invoice separates them. An invoice that says "supply and fit, £12,000" with no split invites a deduction on the whole figure, and the contractor is entitled to take one where the split is not credible. Itemise, every time.
For a company, the deductions suffered are set against its PAYE and National Insurance liabilities month by month, with any remaining balance claimed after the tax year ends. For a sole trader or partnership, they go against the self assessment liability. So the tax is not lost. It is simply held, in a year when your own tax bill is very often smaller than the amount deducted, because a labour-only business has a big turnover and a modest profit.
That gap is what gross payment status fixes. Nothing else about it is interesting. It is a cash flow instrument.
Three tests, and the third is the one that catches people
To hold gross payment status, a business has to pass three tests.
The business test. You carry on a business in the UK which consists of or includes construction work, the business is run largely through a bank account, and you can show HMRC records of it.
The turnover test. HMRC looks at construction turnover in the twelve months before the application, excluding VAT and excluding the cost of materials. For a sole trader the threshold is £30,000. For a partnership it is £30,000 for each partner, or £100,000 for the whole partnership, whichever is met first. For a company it is £30,000 for each director, or £100,000 for the whole company, and a company controlled by five or fewer people is tested at £30,000 per director.
The compliance test. In the twelve months to the date of application, you must have filed every return and paid every tax liability on time. Everything: self assessment, corporation tax, PAYE, CIS returns, and since April 2024 VAT as well. HMRC operates a published tolerance for certain minor and technical failures, but it is narrow, and relying on it is not a strategy.
The third test is the one that removes status from established businesses. A CIS return filed a day late, a PAYE payment that missed because a direct debit bounced, a self assessment balancing payment made in February instead of January. None of those feels like a compliance failure while it is happening.
The annual review is automatic and unsentimental
HMRC reviews gross payment status on an ongoing rolling basis, through what it calls the tax treatment qualification test. You do not apply for the review and you will not be reminded that it is coming. If the compliance record over the preceding twelve months fails, HMRC writes to say the status is being withdrawn, typically taking effect around 90 days later.
There is an appeal, in writing, within 30 days. It has to say why the failure happened and it is more likely to succeed where the cause was genuinely outside your control and the failure was isolated. "We were busy" is not a reason. A bank error, a serious illness, or a HMRC processing problem might be.
If the status goes, you normally have to wait twelve months from the date of cancellation before reapplying, and you will need a clean twelve months to point at.
Since 6 April 2024, HMRC has also had the power to remove gross payment status immediately, without the usual notice, where it has reasonable grounds to suspect serious fraud involving VAT, corporation tax, income tax or PAYE. That is a change worth knowing about, and, like everything in this area, worth checking against current guidance rather than a summary.
The same set of 2024 changes took most payments from landlords to tenants for construction work out of CIS altogether, which removed a long-standing trap for commercial tenants doing their own fit-outs.
What it is actually worth, in pounds
Work it out for your own business rather than treating it as a badge.
Take your annual labour turnover, the part that would be subject to deduction. Multiply by 20%. That is the cash that would otherwise be held by HMRC across the year. Then estimate how long, on average, each pound sits there before it is credited or repaid. For most subcontractors the average is somewhere between four and ten months, depending on where in the tax year the work falls and how quickly they claim.
For the bricklayer above, with roughly £384,000 of labour, the deductions are about £76,800 a year, and at any moment a meaningful slice of that is sitting with HMRC. Replacing it means an overdraft or an invoice finance facility, both of which cost real money, or it means carrying less work.
There is a second effect that does not show on a spreadsheet. Gross payment status is a signal to main contractors that you file on time and pay your tax, because that is precisely what it certifies. It gets mentioned in prequalification. Losing it invites a question you would rather not answer.
The defensive habits are dull and they work. Put every filing date in one calendar with a reminder a week ahead. Pay PAYE and CIS by a method that does not depend on somebody remembering. File the monthly CIS return even in a month with no payments, because a nil return is still a return and its absence is still a failure. And if you are about to be late, ring HMRC before the date rather than after it.
Where this shows up in the game
Business Baron deducts CIS at the right rate for the year and holds the money where you cannot spend it, which is the part that matters. The building trades are part of the full game, and larger construction firms arrive with the Property & Construction Track, an add-on to it. Money held back is working capital you do not have, and you feel it in the cash flow rather than the profit.