There are three CIS rates — 0%, 20% and 30% — and the contractor does not choose which one to use. HMRC tells them when they verify you.
Moving between the rates is entirely within your control, but the three tests for the top rate are stricter than most people expect, and the turnover test is the one that stops applications.
The three rates
| Rate | Applies to | What it means |
|---|---|---|
| 0% | Subcontractors with gross payment status | Paid in full, no deductions |
| 20% | Registered subcontractors — “net payment status”, also called payment under deduction | Standard rate |
| 30% | Unregistered subcontractors | The default when HMRC cannot verify you |
At every rate you pay the same tax in the end. What changes is when, and how much of your cash sits with HMRC meanwhile.
How the deduction is actually calculated
The percentage is not applied to the invoice total. Start with the gross amount and take off:
- VAT
- equipment which is now unusable — “consumable stores”
- fuel used, except for travelling
- equipment hired for the job — “plant hire”
- manufacturing or prefabricating materials
- materials, but only if the subcontractor paid for them directly
Apply the CIS percentage to what is left. In practice, the deduction falls on labour.
A worked example on an invoice of £14,400 including £2,400 of VAT and £2,000 of materials the subcontractor bought:
| 0% (gross) | 20% (registered) | 30% (unregistered) | |
|---|---|---|---|
| Gross invoice | £14,400 | £14,400 | £14,400 |
| Less VAT | £2,400 | £2,400 | £2,400 |
| Less materials | £2,000 | £2,000 | £2,000 |
| Amount subject to CIS | £10,000 | £10,000 | £10,000 |
| CIS deduction | £0 | £2,000 | £3,000 |
| Paid to the subcontractor | £14,400 | £12,400 | £11,400 |
The contractor can ask for evidence, such as receipts, that you paid for the materials directly. Without evidence they estimate the cost — and a low estimate means a larger deduction. Send the receipts.
Moving from 30% to 20%
Register as a CIS subcontractor. That is the whole answer.
Registering online gives you net payment status.
One point worth checking if you are already registered but still being deducted at 30%: the details a contractor gives HMRC to verify you must exactly match the details you used to register. A trading name where HMRC holds the legal name, or an abbreviated first name, returns a “not verified” result and a 30% deduction. Give contractors your exact registered details in writing.
Gross payment status: the three tests
Gross payment status means contractors pay you in full, with no deductions, and you settle all your tax and National Insurance at the end of the year. You have to show HMRC that your business passes three tests.
1. The business test
You must show that:
- your business does construction work, or provides labour for it, in the UK
- your business is run through a bank account
2. The turnover test
HMRC looks at your turnover for the last 12 months, ignoring VAT and the cost of materials. Your turnover must be at least:
| Structure | Minimum turnover |
|---|---|
| Sole trader | £30,000 |
| Partnership | £30,000 for each partner, or at least £100,000 for the whole partnership |
| Limited company | £30,000 for each director, or at least £100,000 for the whole company |
| Company controlled by 5 people or fewer | £30,000 for each of them |
Two things trip applicants up. The first is that the figure is labour only — a subcontractor turning over £45,000 including £20,000 of materials has £25,000 for this test and fails. The second is the multiplier: a three-director company needs £90,000, or £100,000 through the whole-company alternative.
3. The compliance test
You must show that you have paid your tax and National Insurance on time in the past.
It is the test people lose status on rather than fail at application, because it applies continuously, not once.
How to apply
You can apply online or by post. The application also registers you for CIS if you have not already registered, so a new subcontractor confident of passing the tests can go straight to gross payment status.
The form depends on whether you are a sole trader, a partnership or a limited company.
You could be fined if you provide false information — and so could anyone who helps you make a false registration.
Once you have gross payment status, you declare your payments as income at the end of the tax year: on your Self Assessment return if you are a sole trader or partner, or on your Corporation Tax return if you own a limited company.
The annual review, and how you lose it
HMRC reviews your business every year to decide whether you keep gross payment status. For a limited company, HMRC reviews the company itself rather than individual directors or shareholders.
You must be on time with your tax returns and payments. You are allowed a small amount of late payments or returns — the test is not absolute perfection.
If you are struggling to pay, contact HMRC. If HMRC gives you more time to pay, that does not affect your gross payment status. Agreeing a Time to Pay arrangement is very different from simply not paying.
If you are heading for a failure:
- HMRC writes explaining that you are about to fail the review, and why.
- You can write back with your reasons. If HMRC accepts your explanation, your status is not removed.
- If you do not reply, or HMRC does not accept the explanation, it writes to confirm the conditions you have not met and that it is withdrawing your gross payment status in 90 days.
- You have 30 days from the date of that letter to appeal.
- If HMRC cancels your status, you must wait a year from the date of the cancellation before you can reapply.
That last point is the sting: a year at 20% while competitors are paid gross, with no route to shorten it.
Is gross payment status worth having?
It is a cash flow benefit, not a tax saving. You still owe exactly the same tax — you just hold the money until it is due rather than HMRC holding it for you.
In favour: on a labour-heavy business, 20% of every invoice is a large amount of working capital. It also removes the year-end reclaim process entirely.
Against: you have to be disciplined enough to set the tax aside yourself, and you are permanently on a compliance test where one bad year costs you the status for a year.
If your business already pays its tax on time, gross payment status is close to free money in working capital terms. If it does not, applying converts an existing cash flow problem into a bigger one.
Frequently asked questions
What are the CIS deduction rates?
There are three: 0% for subcontractors with gross payment status, 20% for registered subcontractors, and 30% for unregistered subcontractors. HMRC tells the contractor which rate to use when it verifies the subcontractor.
Why am I being deducted 30% when I am registered for CIS?
Usually because the details the contractor gave HMRC did not exactly match the details you used to register. A trading name instead of the legal business name, or an abbreviated first name, returns a “not verified” result and a 30% deduction. Give contractors your exact registered details in writing.
What turnover do I need for CIS gross payment status?
HMRC looks at your turnover for the last 12 months, ignoring VAT and the cost of materials. You need at least £30,000 as a sole trader, £30,000 for each partner or at least £100,000 for the whole partnership, and £30,000 for each director or at least £100,000 for the whole company. If your company is controlled by 5 people or fewer, you need £30,000 for each of them.
How do I lose gross payment status?
HMRC reviews your business every year. If you fail, it writes explaining why and giving you a chance to reply. If it does not accept your explanation it withdraws the status in 90 days, and you have 30 days from that letter to appeal. You must wait a year from the date of cancellation before reapplying.
Does a Time to Pay arrangement affect gross payment status?
No. GOV.UK states that if HMRC gives you more time to pay, this will not affect your gross payment status. Contact HMRC if you have problems paying your tax on time rather than simply missing the payment.
Keeping the paperwork behind the rate
Whichever rate applies, the monthly machinery is the same: verify, deduct, issue statements within 14 days of the end of each tax month, pay HMRC by the 22nd, and file the monthly return by the 19th.
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