What Is the Difference Between Gross Payment and Deduction Under CIS

The Construction Industry Scheme (CIS) is designed to ensure that subcontractors in the construction sector pay the correct amount of tax. When a contractor pays a subcontractor, they must determine whether to pay the subcontractor in full (gross) or make a deduction for tax before payment. These two statuses gross payment and deduction determine how tax is handled and how cash flow is managed for subcontractors. This article explains the difference between gross payment and deduction under CIS, how each works, and how subcontractors can apply for gross payment status.

How the Construction Industry Scheme Works

CIS applies to payments made by contractors to subcontractors who carry out construction work in the UK. Under the scheme:

  • Contractors must verify their subcontractors with HMRC before making payments.

  • Depending on the subcontractor’s CIS status, the contractor either pays them gross (without deductions) or makes a tax deduction at 20 percent or 30 percent.

  • Deductions made by contractors are sent to HMRC as advance payments toward the subcontractor’s tax and National Insurance.

This system ensures that tax is collected throughout the year and that subcontractors’ tax affairs remain up to date.

What Is Gross Payment Status

Subcontractors with gross payment status are paid the full amount of their invoices by contractors without any tax deducted at source. Instead, they are responsible for paying their tax and National Insurance directly to HMRC through Self Assessment or Corporation Tax.

To qualify for gross payment status, a subcontractor must:

  • Be registered for the Construction Industry Scheme.

  • Operate a business in the UK and run it through a bank account.

  • Show a history of good tax compliance, including keeping accurate records and submitting tax returns on time.

  • Meet HMRC’s turnover test, which varies depending on whether the subcontractor is self employed, a partnership, or a company.

If approved, HMRC notifies both the subcontractor and any contractors they work with that payments can be made without deductions.

Advantages of gross payment status:

  • Better cash flow, since you receive the full payment upfront.

  • Easier financial management and forecasting.

  • Professional credibility, as gross payment status indicates strong tax compliance.

Disadvantages:

  • You must manage your own tax payments, which requires discipline and careful budgeting.

  • If you fall behind on tax submissions or payments, HMRC may withdraw your gross payment status.

What Is Deduction Status

Subcontractors who do not have gross payment status will have tax deducted from their payments under CIS.

There are two possible deduction rates:

  • Standard rate (20 percent): For subcontractors registered with CIS.

  • Higher rate (30 percent): For subcontractors who are not registered or whose details cannot be verified by HMRC.

The contractor deducts the appropriate percentage from the subcontractor’s labour charges (excluding materials and VAT) and pays it to HMRC. These deductions count as advance tax payments and are credited against the subcontractor’s final tax bill.

Example:
A subcontractor invoices £1,000 for labour.

  • If they are registered with CIS, the contractor deducts 20 percent (£200) and pays £800 to the subcontractor.

  • If they are not registered, the contractor deducts 30 percent (£300) and pays £700.

  • The deducted amount (£200 or £300) is sent to HMRC on the subcontractor’s behalf.

When the subcontractor files their tax return, these deductions are offset against their total tax liability. If too much has been deducted, they can claim a refund.

Key Differences Between Gross Payment and Deduction

The main difference between gross payment and deduction status is how and when tax is paid.

Feature Gross Payment Deduction

Who deducts tax Subcontractor pays tax directly to HMRC Contractor deducts tax at source

Cash flow Subcontractor receives full payment Subcontractor receives payment minus

deduction

HMRC compliance Must have a clean compliance record to qualify Automatically applied if not approved for gross

payment

Responsibility for tax Subcontractor manages their own tax payments Tax deducted and paid by contractor

Impact on business Greater flexibility but requires careful planning Reduced cash flow but less administrative

burden

Both statuses are part of the same scheme, and subcontractors can move from deduction status to gross payment status if they meet HMRC’s criteria.

How to Apply for Gross Payment Status

Subcontractors can apply for gross payment status when they first register for CIS or at a later date once they meet the necessary requirements. The process involves:

  1. Registering with HMRC for the Construction Industry Scheme.

  2. Providing your Unique Taxpayer Reference (UTR), National Insurance number, and business details.

  3. Requesting gross payment status and agreeing to HMRC checks on your tax compliance and turnover.

HMRC will review your records and, if you qualify, approve your application. You will receive confirmation in writing, and contractors will be able to verify your gross status through the HMRC system.

If your application is rejected, you will continue under deduction status until you can reapply after six months.

What Happens If You Lose Gross Payment Status

HMRC can cancel gross payment status if you fail to keep your tax affairs in order. This could happen if you:

  • File tax returns late.

  • Miss tax payments.

  • Fail to maintain proper accounting records.

If your gross payment status is withdrawn, contractors must start deducting CIS tax from your payments again. You can appeal HMRC’s decision or reapply after improving your compliance record.

CIS and VAT Interaction

It is important to remember that CIS deductions are calculated before VAT. This means VAT is charged on the full invoice value, but deductions apply only to the labour portion of the invoice excluding VAT and materials.

If you are VAT-registered and working under the domestic reverse charge, the contractor will account for VAT directly to HMRC, and no VAT will be added to your invoice. CIS deductions will still apply to the labour element.

Record Keeping Requirements

Both contractors and subcontractors must keep accurate records to support CIS transactions, including:

  • Invoices and payment statements.

  • Verification numbers for subcontractors.

  • Details of CIS deductions and payments to HMRC.

Subcontractors should also retain copies of deduction statements provided by contractors, as these are needed to claim credit for tax already paid.

HMRC requires CIS records to be kept for at least three years, and failure to do so can result in penalties.

How an Accountant Can Help

An accountant experienced in construction industry taxation can help you manage your CIS obligations and apply for gross payment status. They can:

  • Verify subcontractor details and ensure correct deductions are made.

  • Apply for or maintain gross payment status with HMRC.

  • Prepare and file CIS and tax returns.

  • Reconcile CIS deductions against your tax bill.

  • Provide advice on VAT and the domestic reverse charge.

Having professional support ensures accuracy, compliance, and better cash flow management.

Summary

The key difference between gross payment and deduction under CIS lies in how tax is collected. Subcontractors with gross payment status receive full payments and handle their own tax directly with HMRC, while those under deduction status have tax withheld by contractors at 20 percent or 30 percent.

Gross payment status offers more control and better cash flow but requires a strong record of tax compliance. Understanding your CIS status and keeping accurate records will help you stay compliant, claim the right tax credits, and manage your business finances effectively.