CIS (the Construction Industry Scheme) layers an extra compliance regime on top of ordinary Self Assessment for construction contractors and subcontractors. Late CIS300 monthly returns trigger their own penalty escalator. CIS deductions suffered by subcontractors need to be reclaimed through specific routes. Gross Payment Status, where held, can be withdrawn for compliance failures, with a substantial margin impact. This guide covers the full CIS recovery framework for contractors who have fallen behind.
The recovery work splits into three streams. For contractors: catching up on missed monthly CIS300 returns and recovering Gross Payment Status if lost. For subcontractors: reconciling CIS deductions suffered against personal or company tax due, and reclaiming any overpayment. For both: ensuring the recent reverse charge VAT regime is correctly applied alongside CIS.
GPS withdrawal happens fast and recovery takes 12 months
Gross Payment Status (GPS) lets a subcontractor receive payments without the standard 20% CIS deduction. HMRC withdraws GPS for compliance failures (late CIS300s, late personal tax, late corporation tax, late PAYE). Recovery requires 12 months of clean compliance plus formal reapplication. The cash-flow impact during the GPS-withdrawn period is substantial.
The CIS300 late filing penalty escalator
Contractors must file a CIS300 return every month showing payments to subcontractors and deductions made, by the 19th of the month following payment. Late filing triggers automatic penalties:
- 1Day 1 late: £100 fixed penalty.
- 22 months late: another £200 fixed penalty.
- 36 months late: 5% of the CIS deductions due, or £300, whichever is greater.
- 412 months late: another 5% of CIS deductions or £300, whichever is greater.
- 5Inaccurate returns also attract percentage-based penalties depending on behaviour (innocent/careless/deliberate).
A contractor with 12 months of unfiled CIS300s on a portfolio of subcontractor payments can rapidly accumulate £3,000 to £10,000+ in penalties. The escalator pauses once the returns are filed; it does not retrospectively reduce penalties already accrued.
How Gross Payment Status works and how to keep it
GPS is granted on application to subcontractors who pass three tests: business test, turnover test, and compliance test. The compliance test is where most GPS holders lose their status:
- Self Assessment must be filed and paid on time.
- Corporation tax (where applicable) must be filed and paid on time.
- PAYE must be operated and paid on time.
- CIS returns (where the holder is also a contractor) must be filed and paid on time.
- VAT must be filed and paid on time where the trader is registered.
A single late filing or payment within the 12-month review window can trigger GPS withdrawal. HMRC issues a warning where minor; full withdrawal where the breaches are repeated. Once GPS is withdrawn, the standard 20% deduction returns and the compliance clock restarts.
Recovering CIS deductions suffered
Subcontractors paid under CIS have 20% (or 30% if not verified) deducted from labour payments. Those deductions are paid to HMRC by the contractor and should match against the subcontractor's eventual tax bill. Recovery routes depend on the subcontractor's structure:
| Subcontractor structure | Recovery route |
|---|---|
| Sole trader | Offset against Self Assessment liability; refund of any excess via Self Assessment |
| Limited company | Offset against PAYE/CIS due via Employer Payment Summary (EPS) |
| Limited company with no PAYE/CIS due | R38 form to reclaim from HMRC |
| Partnership | Offset against partner's Self Assessment in their share of the partnership's deductions |
Subcontractor verification and the 30% rate
A contractor must verify each new subcontractor with HMRC before payment. Verified subcontractors are deducted at 20% (registered for CIS) or 0% (GPS holders); unverified subcontractors are deducted at 30%. The 10% margin between verified and unverified is significant; it reflects HMRC's view that unverified subcontractors are higher compliance risk. Verification is quick (online) and should not be skipped.
CIS and the Domestic Reverse Charge VAT
Since 1 March 2021, most B2B construction services within the CIS regime are subject to the Domestic Reverse Charge (DRC) for VAT. The contractor (the recipient of the services) accounts for the VAT rather than the subcontractor charging it. This sits alongside CIS rather than replacing it; both regimes apply to the same payments.
For late CIS recovery work, the DRC needs to be checked alongside. Common errors include:
- Subcontractor charging VAT on a DRC supply (incorrect — the contractor accounts for it instead).
- Contractor failing to account for the reverse-charged VAT on the relevant VAT return.
- Misclassification of which services fall inside vs outside the DRC scope.
- End-user certificate complications where the customer is the final user (then DRC does not apply).
The practical recovery sequence
For a contractor or subcontractor catching up on CIS arrears, the practical sequence:
- 1File all outstanding CIS300 monthly returns (for contractors) and Self Assessment / CT600 (for subcontractors). The escalator pauses on filing.
- 2Submit reasonable excuse appeals for any penalties that have grounds.
- 3Reconcile CIS deductions suffered (for subcontractors) against tax due via the appropriate route.
- 4For lost GPS: complete 12 months of clean compliance and reapply.
- 5Set up monthly compliance routines that prevent future drift (CIS300 calendar, payment reminders, automated software for verification and returns).
Behind on CIS returns or lost GPS? Get specialist construction tax help.
A specialist will catch up the returns, reconcile the deductions suffered, recover any overpayment via R38 or EPS, and rebuild the compliance position needed to reapply for GPS. Free initial assessment.