The Construction Industry Scheme (CIS) has long been a focus for HM Revenue & Customs (HMRC) as it seeks to combat tax evasion and organised labour fraud. However, from 6 April 2026, the compliance landscape has changed significantly. New powers give HMRC the ability to pursue businesses that either knew, or should reasonably have known, they were involved in a supply chain connected to deliberate tax non-compliance.
The reforms represent one of the most significant changes to the CIS in recent years and place greater emphasis on supply chain due diligence. For contractors, subcontractors and the advisers who support them, the message is clear: failing to identify warning signs of fraud could now prove extremely costly.
What has changed?
Under the new legislation, HMRC can take action where a business makes or receives payments connected with construction work and knew, or should reasonably have known, that another party in the supply chain was involved in deliberate tax fraud. The measures are designed to target businesses that either knowingly participate in fraudulent arrangements or ignore obvious indicators of non-compliance.
Where HMRC believes the test has been met, it can immediately withdraw a business’s Gross Payment Status (GPS), assess it for the tax lost as a result of the fraud and impose penalties of up to 30% of that tax loss. In some circumstances, company officers may also become personally liable for those penalties. Businesses that lose GPS under these provisions will be unable to reapply for five years, rather than the previous 12-month period.
HMRC believes the measures will generate more than £200 million in additional tax revenue during 2026/27, reflecting its expectation that the reforms will have a significant deterrent effect on fraud within the construction sector.
The importance of the ‘should have known’ test
Perhaps the most challenging aspect of the new rules is the introduction of the “should have known” standard. Businesses may now face serious consequences even where they did not actively participate in fraud if HMRC concludes they failed to carry out reasonable checks or ignored warning signs.
This mirrors powers already used successfully in tackling VAT carousel fraud, extending similar principles into the CIS. HMRC’s focus is increasingly shifting away from simple paperwork compliance towards assessing whether businesses exercised appropriate commercial judgement when selecting and monitoring suppliers.
For many construction businesses, this represents a cultural shift. Demonstrating genuine due diligence may become just as important as maintaining accurate CIS records.
Due diligence is now a commercial necessity
HMRC has consistently warned businesses about organised labour fraud within construction supply chains. Its guidance encourages contractors to verify subcontractors, question unusually favourable pricing, investigate frequent changes in company details, confirm VAT and CIS registrations and be alert to businesses that repeatedly disappear or default on tax liabilities.
While compliant businesses should not be affected, HMRC expects organisations to undertake proportionate checks before entering commercial relationships. Businesses should also retain evidence of those checks, as documentation may become critical if HMRC later questions whether sufficient due diligence was performed.
For accountants, this creates an opportunity to help clients establish robust onboarding procedures, document supplier verification processes and regularly review higher-risk relationships.
Industry reaction
The construction sector broadly supports efforts to remove fraud that undermines legitimate businesses, but there are concerns about how the new rules will be applied in practice.
The Finishes and Interiors Sector (FIS) has highlighted that businesses could be caught not only where they knowingly engage with fraudulent suppliers but also where insufficient due diligence means they unwittingly become part of a fraudulent supply chain. The organisation has urged firms to review their internal controls and supplier verification processes in light of the new rules.
Tax specialists have also suggested that HMRC investigations are likely to place greater emphasis on behavioural evidence rather than simply whether forms have been completed correctly. Increasing attention is expected to focus on how subcontractors are vetted, how commercial decisions are documented and whether warning signs were properly investigated.
What businesses should do now
Construction businesses should view the new powers as a prompt to review their existing compliance procedures rather than simply another regulatory burden.
Supplier due diligence should be documented and consistently applied. Internal policies should ensure staff understand the indicators of labour fraud, while periodic reviews of subcontractor relationships can help identify emerging risks. Businesses should also retain clear evidence of the enquiries made before engaging new suppliers and throughout ongoing commercial relationships.
Professional advice may also prove invaluable where complex labour supply chains or umbrella company arrangements are involved.
A new era for CIS compliance
The latest reforms demonstrate HMRC’s determination to tackle fraud throughout the construction supply chain rather than focusing solely on those directly evading tax.
For compliant businesses, the message is not to become fearful but to become more vigilant. Strong governance, well-documented due diligence and regular reviews of supply chain risk will provide the best defence should HMRC ever question whether a business “should have known” that fraud was taking place.
As HMRC’s expectations continue to evolve, proactive compliance is rapidly becoming an essential part of doing business in the construction industry rather than simply an administrative exercise.