HM Revenue & Customs (HMRC) has significantly tightened its grip on tax fraud within the construction sector, introducing new rules that hold contractors accountable for fraudulent activities occurring anywhere within their supply chains. These stringent measures, effective from April 6, 2026, represent the most substantial overhaul of the Construction Industry Scheme (CIS) in two decades, aiming to close the tax gap and combat organised criminal gangs.

Key Takeaways

• Contractors face severe penalties, including loss of Gross Payment Status (GPS) for at least five years, significant fines, and personal liability for tax losses if they “knew or should have known” about fraud in their supply chain.
• The “should have known” principle, mirroring VAT countermeasures, means ignorance is no longer a defence; proactive due diligence is now mandatory.
• These changes are expected to raise substantial revenue for the Treasury and are partly influenced by lessons learned from past corporate failures like Carillion.

Increased Contractor Accountability

Under the revised CIS regulations, contractors are now legally obligated to conduct thorough due diligence on their subcontractors. Failure to do so, or turning a blind eye to suspicious activities, can result in the loss of Gross Payment Status (GPS). GPS allows contractors to pay subcontractors without deducting tax at source, and its revocation can severely impact a company’s cash flow and ability to secure future work, as it is often a prerequisite for tender processes.

Companies found to be knowingly engaging with fraudulent operators or failing to identify tax evasion within their supply chains will face losing their GPS for a minimum of five years. Furthermore, they could be liable for the full amount of tax evaded, plus financial penalties of up to 30% of that sum. In some cases, directors may also face personal penalties.

The “Should Have Known” Principle

A cornerstone of the new rules is the “should have known” principle, adapted from existing VAT fraud countermeasures. This means that a contractor’s defence of not being aware of a subcontractor’s fraudulent activities will not be accepted if evidence suggests they ought to have been aware. This places a significant onus on businesses to implement robust monitoring and verification processes for all entities within their supply chain.

Experts advise that companies must adopt a structured onboarding process for subcontractors, verifying their CIS status, VAT registration, company details, and bank account ownership. Maintaining a clear audit trail of these checks is crucial for demonstrating due diligence.

Broader Implications and Revenue Generation

The Treasury anticipates that these enhanced enforcement measures will generate an additional £205 million in tax revenue in their first year. The reforms are designed to disrupt sophisticated scams, including those involving missing traders and contrived supply chains, which have been draining millions from the Exchequer.

In addition to the focus on supply chain fraud, two other changes to CIS have been implemented: contractors are now legally required to file a monthly CIS return, even if no subcontractors were paid, and payments to local and public authorities will be excluded from the CIS scope.

A Shift Towards Proactive Compliance

These changes signal a significant shift in how HMRC approaches CIS compliance, moving from a reactive stance to one that demands proactive vigilance from contractors. The aim is to create a more transparent and secure construction industry, ensuring that tax obligations are met throughout the entire supply chain and holding businesses accountable for their role in preventing fraud.

Sources

• Contractors face fines for supply chain tax fraud under new CIS rules, Building.
• HMRC broadens CIS fraud powers beyond direct offenders, Construction Enquirer.
• CIS fraud clampdown puts directors in the firing line, Construction Enquirer.
• HMRC Expands CIS Fraud Powers, Holding Directors Liable for Supply Chain Tax Evasion, fakta.co.