Losing gross payment status under the Construction Industry Scheme is one of the most immediately damaging things HMRC can do to a subcontracting business, deductions jump straight from 0% to 20% or 30% on every payment, hitting cash flow overnight. New powers taking effect from April 2026 make the position considerably more serious for businesses connected, even unknowingly, to fraud further up their supply chain.
What gross payment status actually does
Under the Construction Industry Scheme, contractors must normally deduct tax at source, 20% for registered subcontractors, 30% for unregistered ones, from payments to subcontractors and pay it to HMRC on account of the subcontractor's eventual tax liability. Gross payment status removes that deduction entirely: a subcontractor holding it is paid in full, and settles its own tax liability through the normal self-assessment or corporation tax cycle. For a subcontracting business, gross payment status is the difference between full cash flow and having 20–30% of every invoice withheld until the annual tax return catches up, a difference that can be the difference between a healthy business and a genuine cash-flow crisis.
To hold gross payment status, a business must pass three tests at the point of application and continue to meet them on an ongoing basis: a business test (carrying on a genuine construction business through a UK bank account), a turnover test (a minimum threshold of construction turnover, net of materials), and, in practice the one that trips up most businesses, a compliance test, requiring tax returns and payments across the main taxes to have been made on time throughout the review period, generally with limited tolerance for minor, isolated defaults.
Why HMRC refuses or withdraws status
HMRC reviews gross payment status annually as a matter of course, and the compliance test is where most withdrawals originate: a handful of late VAT returns, a missed PAYE payment deadline, or an outstanding self-assessment filing can be enough to fail the review, even where the underlying tax has ultimately been paid in full. HMRC's guidance does allow for a small number of minor compliance failures to be disregarded, but the tolerance is narrow, and businesses are often caught out by defaults they did not realise mattered, a single late VAT return submitted a few days after the deadline, for example.
Separately, and now considerably more consequentially, HMRC has long had powers to withdraw status where it suspects the business has been involved in tax fraud. What changes from 6 April 2026 is the scope and severity of this power: HMRC gains the ability to cancel gross payment status immediately, without the usual review process, where it has reasonable grounds to suspect the business knew or should have known that payments made or received within its supply chain were connected to the fraudulent evasion of VAT, Income Tax, Corporation Tax or PAYE, even where the fraud itself was committed by another business in the chain.
The April 2026 reforms in full
From 6 April 2026, three changes materially raise the stakes for construction businesses. First, the immediate cancellation power described above, removing the usual notice and review process where fraud-connection grounds are met. Second, a 30% penalty on the tax lost through the fraud can be levied not just on the business itself but on its directors and other connected persons personally, a significant departure from the company-only liability that has traditionally applied. Third, the reapplication interval for a business whose status has been withdrawn on fraud-connection grounds rises from one year to five years, a substantial escalation that can effectively end a subcontracting business's ability to compete on cash-flow terms for half a decade.
Alongside these fraud-specific changes, VAT compliance now forms part of the ordinary gross payment status compliance test for all applicants and holders, not just an incidental factor, meaning even minor, unrelated VAT compliance issues can now jeopardise status that has nothing to do with any suspicion of fraud.
How these disputes typically unfold
Case A: The late VAT return that cost more than it should
A well-established subcontracting business files a single VAT return eight days late after a bookkeeper's illness, an isolated lapse in an otherwise clean compliance history. HMRC's annual review withdraws gross payment status on the compliance test, and the sudden loss of full payment on every invoice creates an immediate cash-flow strain. Because the business can show the default was genuinely isolated, promptly remedied, and supported by evidence of the bookkeeper's illness, a statutory review overturns the withdrawal and status is reinstated without the need for a tribunal appeal.
Case B: The supply chain the business didn't look closely enough at
A groundworks contractor regularly engages a labour-supply subcontractor offering rates noticeably below the market, without carrying out meaningful due diligence on who was actually operating that business or how it was managing its own tax affairs. When HMRC uncovers fraud in that supplier's own tax filings, it takes the view the contractor should have known something was amiss given the pricing and lack of verifiable trading history, and cancels the contractor's gross payment status under the new fraud-connection power. Because the contractor genuinely carried out no due diligence at all and cannot point to any steps taken to verify the supplier, the tribunal upholds the cancellation, illustrating why basic supply-chain checks are no longer optional for businesses wanting to protect their own status.
Getting status back
Where withdrawal was based on the compliance test, the fastest route back is usually a statutory review, showing either that the relied-on failures were minor and isolated (falling within HMRC's own tolerance guidance), or that a reasonable excuse existed for the specific default. Where withdrawal was based on suspected fraud connection, the case turns on evidencing what due diligence was actually carried out on the supply chain in question, verification of subcontractors' trading history, tax registration, and pricing that was consistent with the genuine market rather than suspiciously favourable. A business that can point to a documented, applied due-diligence process is in a materially stronger position than one relying on general assertions of good faith after the event.
Related guides in this series
- HMRC statutory review and the tax appeals ladder
- Reasonable excuse: the complete guide
- MTIC / carousel fraud explained
- The Kittel principle: knew or should have known
Frequently asked questions
Why has my CIS gross payment status been withdrawn?
Usually because an annual compliance review found you failed the compliance test (late filing or payment). From April 2026, HMRC can also cancel status immediately where it has reasonable grounds to suspect you knew or should have known your supply chain was connected to fraud.
What is the new April 2026 CIS fraud power?
From 6 April 2026, HMRC can immediately cancel gross payment status and hold the business, directors and connected persons liable for fraud-related tax losses plus a 30% penalty, where it knew or should have known of a fraud connection. The reapplication interval also rises from one to five years.
How long does gross payment status withdrawal last?
Around 12 months under standard compliance-test withdrawal. Under the new fraud-connection power from April 2026, the reapplication interval is five years.
Can I appeal a refusal or withdrawal of gross payment status?
Yes, via HMRC statutory review and then the First-tier Tribunal if needed. Success depends on showing the compliance failures were minor or excused, or, for fraud-connected cancellations, that you neither knew nor should have known of any fraud connection.