April 2026 saw HM Revenue & Customs (HMRC) enhance its anti-fraud measures for construction businesses.
This toughened-up approach aims to reduce abuse and non-compliance across construction industry supply chains.
Businesses that ‘knew or should have known’ that their transactions were connected to CIS or PAYE fraud could face serious consequences.
‘Knew or should have known’ – recognising the risks
The due diligence and background checks that contractors make when they are hiring subcontractors need to be water-tight, as there are severe penalties for those who overlook potential fraud.
The ‘knew or should have known’ approach significantly increases the risks for all contractors that engage with suppliers involved in deliberate CIS or PAYE non-compliance, even where the contractor is not directly involved in the fraud itself.
With this being an objective test, HMRC does not need to prove actual knowledge or participation in the fraud. They will consider whether, based on the facts, a reasonable business should have recognised the risk.
For example, ignorance or deliberate carelessness, such as engaging subcontractors at suspiciously low rates or failing to conduct basic CIS verifications, can trigger penalties.
Set-up, monitoring and record keeping
Businesses should keep a record (for at least three years) of a subcontractor’s
– verification number, and the date they were verified
– and the deduction rate provided by HMRC.
They should continuously monitor subcontractors and keep clear records.
For example, if a subcontractor’s business structure changes, or if they have not worked with the subcontractor in the current or last two tax years, the process should be repeated.
Consequences
1) The immediate removal of Gross Payment Status (GPS). HMRC can instantly strip a business of its GPS. During the resulting penalty period, contractors must deduct 20% to 30% from payments.
2) Extended reapplication ban. If a GPS is cancelled due to fraud, the business is banned from reapplying for five years.
3) Financial and personal penalties. Businesses can be assessed for the lost tax and hit with a 30% penalty. Directors and company officers can also be held personally liable for these penalties.
Background
What is the Construction Industry Scheme (CIS)?
CIS is a tax deduction scheme that applies to payments made by contractors to subcontractors carrying out construction work in the UK.
– the contractor must withhold tax and pay it directly to HMRC
– the withholding rate is 20% for registered subcontractors and 30% for unregistered subcontractors
The rules apply to UK businesses and overseas organisations undertaking construction projects in the UK.
Verifying a subcontractor
Before a contractor makes any payments to a subcontractor, a verification number needs to be obtained from HMRC. This will ensure that the correct tax is deducted – 0% gross, 20% standard, or 30% unregistered.
1) The contractor will need their own business details (UTR, accounts office, and employer references)
2) The subcontractor’s details
– Sole traders: name, Unique Taxpayer Reference (UTR), and National Insurance number.
– Limited companies: Company name, UTR, and company registration number.
– Partnerships: Trading name, partnership UTR, and nominated partner details.
Further information
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