6 April 2026 – What You Need To Do
As flagged in the November 2025 budget, HMRC has acquired significant new powers to combat fraud within the Construction Industry Scheme (CIS).
These measures take effect from 6 April 2026 and create substantial new risks for businesses operating in the construction sector, whether as contractors or subcontractors.
Here are the key changes and recommended actions for both categories of client.
Background
The CIS applies to payments made by businesses which sub-contract construction work – working in a similar fashion to the way PAYE applies to payments made to employees.
CIS requires 30% tax to be withheld from the fees the business pays to the subcontractors. These fees are then remitted to HMRC as a pre-payment of the subcontractors’ own tax liability.
Sub-contractors can gain a partial exemption from the cashflow headache caused by the withholding requirement by registering under the scheme, in which case the withholding is limited to 20%. They can also apply to obtain complete exemption from the withholding – the gold standard ‘gross payment status’ – where they can demonstrate a good compliance history.
The CIS applies not only to obvious candidates, such as those directly engaged in construction work, but also to clients. Specifically, if an employer under a building contract contracts construction work that exceeds the HMRC threshold within a given period, HMRC may classify them as a “contractor” under the CIS and require them to register with the scheme.
What the New Powers Aim To Achieve
The mischief that the new rules seek to address is supply chain fraud. This type of fraud occurs where businesses (both contractors and subcontractors) within a supply chain of contractors and sub-contractors enter transactions they know are connected to fraud, or they ignore clear signs of fraud where there is no other reasonable explanation for the transaction to take place other than it being connected to fraud. These businesses often repeatedly engage with businesses that go missing, or default on payments that should have been made under the CIS.
The key test therefore underpinning liability in the new regime is whether the business “knew or should have known” that its transactions were linked to such fraud. This is an objective test and is not confined to actual knowledge; HMRC may infer knowledge from circumstantial evidence about how payments were made or credits claimed.
The HMRC’s New Powers – What Can They Do if You Knew or Should Have Known About Fraud?
Where the “knew or should have known” test is satisfied, HMRC may employ one or more of the following sanctions:
- Make the contracting business liable to pay the lost tax that should have been withheld (up to 20% of the fees made under a construction contract). Sub-contractors are also caught – where a subcontractor claims credit against its own tax on a return for an amount that should have been withheld by a business under the scheme (but isn’t), or a withholding is made but the subcontractor knew or should have known that the amount would not be paid over to HMRC, then the subcontractor can be pursued for an amount equal to the CIS credit claimed;
- Charge a penalty of up to 30% of the lost tax, which can be transferred to responsible company officers who personally knew or should have known of the connection to non-compliance;
- Immediately cancel the business’ Gross Payment Status (GPS), with the business barred from reapplying for five years.
The "Knew or Should Have Known" Test
HMRC guidance sets out a range of indicators that may suggest a business should have known its transactions were connected to deliberate non-compliance.
These include:
- Unsolicited approaches from organisations with little history in construction;
- Directors with no construction experience;
- Suspiciously low pricing below realistic labour costs;
- The absence of formal contracts on high-value deals;
- Excessive layers of subcontracting;
- Frequent changes of subcontractor entities;
- Instructions to make payments to third parties or offshore.
For subcontractors claiming CIS credits for withholdings made under the scheme, HMRC consider the following to be additional red flags:-
- Unsolicited offers to reduce PAYE/NICs liabilities through purchased CIS credits;
- The introduction of new special purpose vehicles within the supply chain, and
- Invoices that are higher than expected to account for the CIS deduction creating the credit.
Importantly, HMRC will consider the knowledge not only of directors, but also of employees in any capacity, and third-party agents or advisers who assisted in the relevant transactions.
The Role of Due Diligence
Whilst a lack of due diligence alone is unlikely to be sufficient evidence, deficiencies in due diligence may support a finding that the business “should have known” where other factors are also present. Critically, HMRC emphasises that merely conducting enquiries is not enough; a business must take appropriate action on the results.
HMRC does not prescribe a list of checks, but expects businesses to carry out appropriate, proportionate due diligence and risk assessments before entering into transactions. In some cases businesses should consider assessing the integrity of their wider supply chain, not merely their immediate contractual counterparties.
Recommended Actions for Contractor Clients
Businesses making payments under construction contracts should take immediate steps to review and strengthen their supply chain assurance processes. Robust, documented due diligence should be carried out on all subcontractors before contracts are agreed, covering matters such as trading history, director experience, insurance status, credit checks, and the commercial reasonableness of pricing.
Contractors should ensure that formal written contracts are in place for all engagements, particularly high-value arrangements. Any anomalies in invoicing, banking arrangements, or the commercial terms of a deal should be escalated and investigated promptly.
Staff training should be considered so that those involved in procurement and contract management understand the new risk landscape, including the indicators identified in HMRC guidance.
Recommended Actions for Subcontractor Clients
Subcontractor clients, particularly those who claim CIS credits in their tax returns, should review their own supply chain relationships with equal care. They should ensure that CIS deductions claimed on returns are fully supported by valid payment and deduction statements, invoices, and bank statements. Subcontractors should also be cautious about unsolicited approaches offering arrangements to reduce tax liabilities through CIS credits.
Where subcontractors themselves engage further subcontractors, they must ensure CIS deductions are properly made and paid, as failures to do so may expose parties higher in the chain to determinations under the new rules.
Individual directors and officers of subcontractor companies should be aware that personal liability for penalties may attach where their actions gave rise to the company’s non-compliance, and that the “knew or should have known” test will be applied to them individually.
Conclusion
These new powers represent a significant escalation in HMRC’s approach to CIS fraud. To some extent they resemble the approach taken with other regimes tackling fraud, such as the Criminal Finance Act 2017, by apportioning liability for business that are deemed to take a ‘head in the sand’ approach to a lack of tax compliance of parties with which they engage.
Businesses operating in the construction sector should act now to review their compliance procedures, due diligence processes, and supply chain relationships to mitigate the risk of exposure under the new regime.
