HMRC’s new CIS fraud powers should be a serious concern for contractors, subcontractors and anyone operating in the construction supply chain.
Following April 2026, the risk is no longer limited to your own tax compliance.
If you deal with a subcontractor or labour provider involved in deliberate tax non-compliance, HMRC may look closely at whether you knew, or should have known, that something was wrong.
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Topics Discussed:
- How the April 2026 CIS fraud changes may affect contractors, subcontractors and company officers.
- The practical warning signs HMRC may expect construction businesses to identify in their labour supply chains.
What is The CIS Scheme?
The Construction Industry Scheme, usually referred to as CIS, sets out how contractors must deal with payments made to subcontractors for construction work.
Under the scheme, contractors are required to verify subcontractors with HMRC, apply the correct deduction rate where deductions are required and pay those deductions over to HMRC.
The rules apply across a broad range of construction work, including construction, alterations, repairs, extensions, demolition and dismantling.
In simple terms, CIS is designed to make sure tax is collected correctly within the construction industry.
The April 2026 CIS Fraud Changes
Following 6 April 2026, HMRC have been granted stronger powers to tackle fraud within CIS. Where a business makes or receives a payment connected with construction operations, or claims a CIS credit, HMRC can act if the business knew or should have known that the payment or credit was connected to deliberate non-compliance by another party.
This is a major development for the construction sector. A business may not be able to protect itself simply by saying that the fraudulent party was further down the chain or that the tax default was somebody else’s responsibility.
HMRC’s approach is focused on whether there were signs that should have caused concern and whether the business took reasonable steps to check the position before continuing.
The consequences can be serious. HMRC may remove Gross Payment Status, assess the business for the related tax loss and charge a 30% penalty. In some cases, that penalty may also apply personally to directors or other people involved in running the business. This means that trading through a limited company will not always protect those individuals if HMRC believes obvious risks were ignored or basic checks were not carried out.
For that reason, CIS due diligence should not be treated as a simple admin task. It should be part of the business’s wider risk management process, with clear responsibility, proper records and regular reviews.
Why The Supply Chain Now Matters More Than Ever
For many construction businesses, subcontracted labour is part of normal day-to-day trading. A contractor may use bricklayers, electricians, plasterers, roofers, groundworkers or other trades through a limited company, agency or labour provider.
The commercial arrangement may feel routine, but HMRC will expect businesses to pay attention to who they are dealing with and whether the arrangement makes commercial sense.
The risk arises where labour is being supplied through a chain that includes deliberate tax non-compliance. This can include arrangements where a company in the chain collects money, fails to pay tax and then disappears, or where companies are repeatedly liquidated and replaced.
HMRC has warned that criminals may create companies within labour supply chains to pass tax liabilities through shell entities, leaving the final company to default or vanish.
This means that contractors should not treat subcontractor checks as a one-off administrative step.
Warning Signs Contractors Should Not Ignore
HMRC will expect construction businesses to spot obvious risks and ask sensible questions before making payments.
Warning signs may include:
- Labour costs that appear unusually cheap
- Subcontractors regularly changing company names
- Businesses being liquidated and then replaced by new companies
- VAT numbers not matching the business details
- Requests to pay into bank accounts that do not belong to the supplier
- Invoices, contracts, payment details or company information not matching
- No clear trading history
- No physical office address
- Little or no online presence
- Directors linked to several failed companies
None of these points automatically proves fraud, but they are warning signs that should not be ignored.
Where something does not look right, the safest approach is to stop and investigate before making further payments.
The Link with the Kittel Principle
These CIS changes follow a similar approach to rules HMRC has used in VAT fraud cases for many years.
Under the Kittel principle, HMRC can deny VAT claims where a business knew, or should have known, that a transaction was connected to VAT fraud.
HMRC will now apply similar thinking to CIS. It will not just look at whether your own paperwork is correct. It may also look at whether the labour rate seemed realistic, whether the payment arrangements made sense and whether proper checks were carried out.
For construction businesses, this means CIS compliance is no longer just about filing returns correctly. It is also about understanding who you are dealing with and keeping evidence that you have checked your supply chain properly.
Due Diligence Is Now Essential
Due diligence should be completed before entering into an arrangement with a subcontractor or labour provider. In urgent cases, checks may need to be completed immediately afterwards, but the key point is that the business must be able to show what it checked, when it checked it, what the results were and what action was taken if concerns appeared.
Practical checks should include verifying CIS status with HMRC, checking the supplier’s company details, reviewing VAT information where relevant, confirming that bank account details match the business being paid, keeping written contracts, retaining invoices and payment records, and documenting any questions raised about unusual pricing or inconsistent information.
The evidence matters as much as the checks themselves. If HMRC later asks what was done, a business will need records showing that it acted responsibly. Informal assumptions, verbal reassurances and incomplete paperwork may not be enough.
HMRC’s own guidance makes clear that where a person has genuinely done everything they can to check the integrity of the supply chain, can demonstrate those checks and had no other reason to suspect deliberate non-compliance, it is unlikely that they knew or should have known about the failure.
Summary
The April 2026 CIS changes mean construction businesses must take far greater care when engaging subcontractors and labour providers.
HMRC will have powers to remove Gross Payment Status, assess related tax losses and charge penalties where a business knew or should have known that payments or CIS credits were connected to deliberate non-compliance.
The safest approach is to carry out proper due diligence, investigate warning signs and keep clear evidence of every check completed.
If you operate in the construction sector and use subcontractors, get in touch with us today so we can help you review your CIS processes, strengthen your due diligence procedures and reduce the risk of HMRC action.
Fill out our form here, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
