From 6 April 2026, HMRC can pursue a construction business for tax fraud committed elsewhere in its labour supply chain, provided the business knew, or should have known, that something was wrong. The bill can reach 20% of the payments involved plus a 30% penalty, directors are personally in scope, and Gross Payment Status can be removed on the spot. Here is what changed, the warning signs HMRC expects you to spot, and what we are telling our own construction clients to do about it.
The short version
Contractors have always had to verify subcontractors and operate the Construction Industry Scheme correctly. What changed in April is who carries the risk when a labour supply chain turns out to be fraudulent. The new rules bite where a business makes a construction payment, or claims a CIS deduction credit, that it knew or should have known was connected with deliberate tax non-compliance. Where that test is met, HMRC can:
- make a tax determination against the business of 20% of the relevant payments (or the full CIS credit claimed);
- add a penalty of up to 30% of that determination;
- transfer the penalty personally to a company officer where the conduct is attributable to them;
- remove Gross Payment Status immediately, outside the usual review cycle; and
- bar a business whose status was removed for fraud or serious non-compliance from reapplying for five years.
CIS compliance used to mean verifying a subcontractor and deducting the right percentage. From April 2026, it means being able to prove you understood who you were paying.
What actually changed on 6 April 2026?
Until this spring, HMRC’s main weapons against CIS fraud pointed at the fraudster itself, the company skimming deductions or selling fake credits. The problem, as HMRC sees it, is that those companies are usually empty shells, dissolved or phoenixed into a new name by the time anyone catches up. So HMRC introduced new powers that point at their customers instead: the contractors who paid the invoices.
Two situations trigger the rules: making a payment for construction operations, and claiming a CIS deduction credit. In either case HMRC must show the business knew or should have known the payment or credit was connected with deliberate non-compliance. For payments, the determination is 20% of the amount paid; for improper credit claims, it is the credit itself. The penalty on top is up to 30% of whichever figure HMRC determines.
Our view: the design is deliberate. The people still standing after a labour fraud collapses, with assets, bank accounts and a payment status worth protecting, are the contractors who used the supplier. Moving the liability up the chain makes every contractor part of HMRC’s enforcement effort, whether they signed up for the job or not.
“Should have known” is the phrase that matters
You do not need to have taken part in a fraud for these rules to reach you. The test asks what a reasonable contractor in your position would have recognised. That gets judged against what you knew about fraud risk in the industry, anything unusual about the deal or the paperwork, the warning signs sitting in your supply chain, and the checks you actually carried out.
There is a trap in that last item. A due-diligence check only helps if you act on what it tells you. If your onboarding file flagged that a supplier was three months old with a residential registered office, and you filed the check and paid the invoices anyway, that file is no longer your defence. It is HMRC’s evidence.
Under the old rules, not asking questions was cheap. Under the new ones, “we didn’t ask” reads as “we should have known”.
The warning signs HMRC expects you to notice
HMRC publishes its own list of warning signs of labour fraud in construction, and it is worth reading in full, because it is effectively the marking scheme for “should have known”. None of the signs proves fraud on its own. They cluster into three questions:
- Does the business look real? Little or no online presence; no genuine trading address; a company only months old; directors with no visible construction background, or a trail of liquidations behind them.
- Does the money make sense? Labour priced well below the market; payments routed to a different company or an unrelated individual; bank details that keep changing; offers of kickbacks or “savings” nobody can explain.
- Does the paperwork hold up? Missing contracts; invoices that don’t match the work; Payment and Deduction Statements that are wrong, inconsistent or never arrive; supply chains that are unusually long or change month to month.
One of these is a question to ask. Several together are a pattern, and “the arrangement made no commercial sense” is precisely what HMRC will argue you should have seen at the time.
Seven checks before you pay a new subcontractor
There is no statutory checklist, and the rules do not demand a forensic audit of every bricklayer. Checks should be proportionate to the size and risk of the relationship. But for the construction contractors and subcontractors we act for, we’ve found seven checks cover most of the ground, and most cost nothing but a few minutes:
- Verify the right legal entity. Run the CIS verification before the first payment, and make sure the entity you verified is the one on the contract, the invoice and the bank account. All verification tells you is which deduction rate to apply. Treat it as the start of onboarding, not the end of it.
- Read the Companies House file. The free Companies House search shows incorporation date, directors, filing history and registered office in under a minute. A young company is not a problem in itself; a young company claiming to run a 40-strong skilled workforce deserves questions.
- Check the VAT position. Confirm the VAT number is valid and belongs to the business you are dealing with using HMRC’s online VAT checker, and make sure the domestic VAT reverse charge is applied where the conditions are met.
- Look hard at the bank details. The account receiving payment should belong to the business doing the work. Requests to pay a different company, an unrelated individual, or a new account every few months sometimes have innocent explanations. Get the explanation in writing before you pay.
- Get the paperwork straight. Contracts and invoices should identify who supplies the work, what is being done, where, at what price, and who is responsible for providing and paying the labour.
- Understand who actually employs the workers. This matters most where you are buying labour rather than a finished package of work. Who engages the workers? Who pays them? Why is each company in the chain there at all, and who is operating PAYE?
- Apply the commercial credibility test. Step back and ask whether you would believe this company could deliver this workforce, at this price, if you were not the one pocketing the saving.
A worked example: the £19-an-hour workforce
Your business normally pays about £30 an hour for a particular skilled trade. A company incorporated five months ago offers you the same labour at £19. It has no website, its registered office is a house, the director has no construction history you can find, and you are asked to pay a second company you have never heard of.
Nothing on that list is illegal. But suppose you put £250,000 through the arrangement over a year, and HMRC later shows the chain was built to evade PAYE and CIS, and that the signs were visible when you signed:
| Exposure on £250,000 of payments | |
|---|---|
| Determination at 20% of the payments | £50,000 |
| Penalty at up to 30% of the determination | £15,000 |
| Potential total | £65,000 |
| Before the loss of Gross Payment Status, and before professional fees. | |
The £11-an-hour saving was never margin. It is usually someone else’s unpaid PAYE, VAT or CIS, priced into your quote.
If a labour rate only works because somebody in the chain is not paying their taxes, HMRC’s starting position is now that you should have worked that out.
Gross Payment Status is now a single point of failure
Gross Payment Status lets qualifying subcontractors receive construction payments with no deduction withheld. In fraud cases the new rules let HMRC remove it immediately, with no warning period and no annual review cycle, and a business that loses it for fraud or serious non-compliance cannot reapply for five years.
The cash-flow arithmetic is brutal. A subcontracting company receiving £200,000 a month gross suddenly has £40,000 a month withheld at 20%. That money is not lost, since it offsets against tax later, but as working capital it is gone from wages, materials and the next project’s mobilisation. For most businesses that is the difference between trading normally and phoning the bank.
Our advice: treat GPS the way you treat a banking covenant: monitored at board level, protected by process, with named responsibility for the compliance record that keeps it. It is not an administrative status. It is a credit line.
Keep the evidence, not just the habit
Picture HMRC opening an enquiry into a subcontractor you first used three years ago. The supplier has dissolved. The site manager who onboarded them has left. The emails are gone, and nobody remembers who approved what. Reconstructing that story after the event can take days of professional time, and sometimes it cannot be done at all.
So our advice is unglamorous: keep a one-page supplier file for every subcontractor. The verification result, a Companies House snapshot, the VAT check, the contract, bank details, copies of Payment and Deduction Statements, and a dated note of anything unusual with what you did about it. Twenty minutes at onboarding. The point is not paperwork; it is being able to show you understood who you were dealing with, at the time, in writing.
Frequently asked questions
What changed to CIS from 6 April 2026?
HMRC gained new powers against fraud in construction labour supply chains: tax determinations of 20% of relevant payments, penalties of up to 30% of the determination, transfer of penalties to company officers, and immediate removal of Gross Payment Status with a five-year bar on reapplying in fraud cases.
Is a contractor automatically liable if a subcontractor doesn’t pay its tax?
No. The rules apply only where HMRC can show the contractor knew or should have known a payment or CIS credit was connected with deliberate non-compliance. Contractors who checked, kept evidence and acted on warning signs are exactly who the test is designed to leave alone.
Is CIS verification enough due diligence on its own?
No. Verification answers a single narrow question: which deduction rate to apply. It says nothing about who sits further down the chain or whether they are compliant. For labour-supply arrangements in particular, you need to understand the chain, not just the rate.
Can HMRC really remove Gross Payment Status immediately?
Yes. In relevant fraud cases removal takes effect immediately rather than through the usual review process. Where status is removed for fraud or serious non-compliance, the business cannot reapply for five years.
Can a director be personally liable for a CIS fraud penalty?
Yes. Where the business is a company and the conduct is attributable to an officer, HMRC can transfer the penalty to that officer personally. Directors should not assume the exposure stays inside the limited company.
What subcontractor records should we keep?
For each subcontractor: the CIS verification result, a Companies House snapshot, the VAT check, the signed contract, invoices, bank details, Payment and Deduction Statements, and dated notes on anything unusual and how you resolved it.
How Dali & Co can help
We look after CIS registrations, subcontractor verification and monthly CIS returns for construction businesses across the UK, alongside Payment and Deduction Statements, CIS-suffered reconciliations, Gross Payment Status applications and reviews, the domestic VAT reverse charge, payroll, bookkeeping and year-end accounts.
Since April we have been building the new checks into our clients’ monthly routine, so subcontractor onboarding, CIS, VAT and payroll produce the evidence file as a by-product of normal bookkeeping rather than a separate chore that never gets done.
If your business is growing but your subcontractor records still live in spreadsheets, inboxes and WhatsApp threads, fix that before HMRC asks the questions, not after. Get in touch and we’ll review your process with you.
Written by Dali & Co Accountants, accountants for UK construction contractors and subcontractors.
Last reviewed: 24 August 2026
This article is general information, not tax or legal advice. How the CIS rules apply depends on the facts and circumstances of each case.