Construct.law - Spring 2026
Sharper teeth, more returns – Construction Industry Scheme tax reforms target fraud prevention and increase administration for contractors
By William Turner, Elizabeth Hughes & Alexander Hemmings
Construct.law - Spring 2026
Sharper teeth, more returns – Construction Industry Scheme tax reforms target fraud prevention and increase administration for contractors
By William Turner, Elizabeth Hughes & Alexander Hemmings
Recent changes to the Construction Industry Scheme (CIS), the regime governing tax deductions from payments by contractors to subcontractors, are aimed at streamlining CIS administration and preventing fraud facilitated through CIS payments. The changes will come into force on 6 April 2026.
Recent changes to the Construction Industry Scheme (CIS), the regime governing tax deductions from payments by contractors to subcontractors, are aimed at streamlining CIS administration and preventing fraud facilitated through CIS payments. The changes will come into force on 6 April 2026.
What is the Construction Industry Scheme?
The CIS was designed to prevent tax evasion in the construction industry. Under the CIS, tax must be deducted from certain payments made by contractors to subcontractors and paid to HMRC. Contractors must make the required tax deductions and account to HMRC for that tax. Any subcontractor receiving a payment net of tax can offset the amount deducted against their PAYE or income tax. Payments fall within the CIS if they are made under a contract for construction operations that take place in the UK. A party will be a “contractor” under the CIS if it is either a mainstream contractor (i.e. carries on a business that includes construction operations) or a deemed contractor (a business whose expenditure on construction operations exceeds £3 million in a 12-month period). Contractors must register with HMRC. Subcontractors fall within three categories: (1) those who are not registered with HMRC and are subject to 30% tax deductions, (2) those who are registered with HMRC and are paid net of 20% deductions, and (3) those who are not subject to deductions and registered with “Gross Payment Status”. Gross Payment Status is subcontractors’ preferred position because they will not suffer any cash flow consequences due to tax being withheld.
What is the Construction Industry Scheme?
The CIS was designed to prevent tax evasion in the construction industry. Under the CIS, tax must be deducted from certain payments made by contractors to subcontractors and paid to HMRC. Contractors must make the required tax deductions and account to HMRC for that tax. Any subcontractor receiving a payment net of tax can offset the amount deducted against their PAYE or income tax. Payments fall within the CIS if they are made under a contract for construction operations that take place in the UK. A party will be a “contractor” under the CIS if it is either a mainstream contractor (i.e. carries on a business that includes construction operations) or a deemed contractor (a business whose expenditure on construction operations exceeds £3 million in a 12-month period). Contractors must register with HMRC. Subcontractors fall within three categories: (1) those who are not registered with HMRC and are subject to 30% tax deductions, (2) those who are registered with HMRC and are paid net of 20% deductions, and (3) those who are not subject to deductions and registered with “Gross Payment Status”. Gross Payment Status is subcontractors’ preferred position because they will not suffer any cash flow consequences due to tax being withheld.
Tackling CIS fraud
The Finance Act 2026 introduced additional measures to deter evasion of tax under the CIS. Evasion can take place where a contractor fails to deduct or account to HMRC for tax, or where a subcontractor reclaims a deduction that has not been made. The measures target all parties to a construction contract who knew or should have known about such fraudulent tax evasion. In addition to being liable for lost tax, interest and penalties, businesses caught by these rules face cancellation of their Gross Payment Status for at least five years. The measures aim to ensure that businesses undertake the necessary due diligence to prevent fraudulent operators from entering the market and undercutting compliant businesses.
Tackling CIS fraud
The Finance Act 2026 introduced additional measures to deter evasion of tax under the CIS. Evasion can take place where a contractor fails to deduct or account to HMRC for tax, or where a subcontractor reclaims a deduction that has not been made. The measures target all parties to a construction contract who knew or should have known about such fraudulent tax evasion. In addition to being liable for lost tax, interest and penalties, businesses caught by these rules face cancellation of their Gross Payment Status for at least five years. The measures aim to ensure that businesses undertake the necessary due diligence to prevent fraudulent operators from entering the market and undercutting compliant businesses.
Nil returns required from mainstream contractors
From 6 April 2026, mainstream contractors must file a nil return when they have not paid any subcontractors in a given tax month (unless the contractor notifies HMRC in advance – 14 days before the beginning of the month – that it will not make any such payments that month). HMRC view this change, introduced by the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2026, as a simplification. It is counterintuitive that an increase in compliance obligations is a simplification. HMRC’s rationale is that where returns were not filed, this led to late filing penalties being issued erroneously. Contractors often did not appeal such penalties, leading to significant accumulation of penalty debt that was not due. This increased compliance burden does not affect deemed contractors.
Local authorities and public bodies
The Income Tax (Construction Industry Scheme) (Amendment) Regulations 2026 also provide that payments to local authorities and certain public bodies fall outside the CIS, as those entities are automatically entitled to Gross Payment Status. This is not a change in practice as the same exemption has been available by Extra-Statutory Concession.
Nil returns required from mainstream contractors
From 6 April 2026, mainstream contractors must file a nil return when they have not paid any subcontractors in a given tax month (unless the contractor notifies HMRC in advance – 14 days before the beginning of the month – that it will not make any such payments that month). HMRC view this change, introduced by the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2026, as a simplification. It is counterintuitive that an increase in compliance obligations is a simplification. HMRC’s rationale is that where returns were not filed, this led to late filing penalties being issued erroneously. Contractors often did not appeal such penalties, leading to significant accumulation of penalty debt that was not due. This increased compliance burden does not affect deemed contractors.
Local authorities and public bodies
The Income Tax (Construction Industry Scheme) (Amendment) Regulations 2026 also provide that payments to local authorities and certain public bodies fall outside the CIS, as those entities are automatically entitled to Gross Payment Status. This is not a change in practice as the same exemption has been available by Extra-Statutory Concession.
What does this mean for construction industry participants?
The new fraud prevention measures reflect HMRC’s ongoing commitment to reducing tax evasion. The measures impose an objective test: it will not be a defence for a business to show it had no actual knowledge that payments it made or received were connected with fraudulent tax evasion. Where such a connection exists, a business that should have known of it risks losing Gross Payment Status and incurring significant financial penalties that may attach to their directors and officers personally. To protect their position, contractors and subcontractors should conduct comprehensive due diligence on their counterparties. Contemporaneous records of such due diligence should be maintained to demonstrate what investigative steps were taken and when. This will be key in any dispute with HMRC. To avoid incurring penalties for failure to file a return or needing to give notice to HMRC in advance, mainstream contractors must now file a CIS return every month. It is helpful that deemed contractors, who would be more likely to have periods where they do not pay subcontractors, are unaffected by this change.
What does this mean for construction industry participants?
The new fraud prevention measures reflect HMRC’s ongoing commitment to reducing tax evasion. The measures impose an objective test: it will not be a defence for a business to show it had no actual knowledge that payments it made or received were connected with fraudulent tax evasion. Where such a connection exists, a business that should have known of it risks losing Gross Payment Status and incurring significant financial penalties that may attach to their directors and officers personally. To protect their position, contractors and subcontractors should conduct comprehensive due diligence on their counterparties. Contemporaneous records of such due diligence should be maintained to demonstrate what investigative steps were taken and when. This will be key in any dispute with HMRC. To avoid incurring penalties for failure to file a return or needing to give notice to HMRC in advance, mainstream contractors must now file a CIS return every month. It is helpful that deemed contractors, who would be more likely to have periods where they do not pay subcontractors, are unaffected by this change.
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