HMRC is clamping down on the construction industry with amended legislation effective April 2026
The 2nd reading of the Finance budget has commenced (Finance (No. 2) Bill).
Changes to the Construction Industry Scheme rules (originally enacted under the Finance Act 2004) have been billed as strengthening HMRC’s powers to tackle fraud in the CIS regime. However, on first reading of the draft legislation, this amendment (if approved) could have much wider consequences for subcontractors and contractors within the CIS regime.
What is the proposal?
CIS legislation will be strengthened so that if payments or returns are made in the knowledge that they are incorrect, HMRC can pursue more parties within the supply chain based on their actions/behaviour. This will be via the insertion of two new sections, 62A and 62B.
At first glance, you could be led to think it states “deliberate”; therefore, this is aimed at fraud. However, if you read the wording more closely, it includes “should have known”. This goes beyond you knew it was wrong. Should have known can include careless, you didn’t ask enough questions (and we think you should have done), etc. In other words, it’s open to interpretation. It gives HMRC more discretion to determine when it applies.
So why could this matter?
Two reasons:
- If you’re deemed complicit in the actions of another party, HMRC will have powers to recoup what should have been paid by you. The amount, 20% of the payment made between parties, i.e. 20% CIS tax deduction. What’s more, they can impose a penalty on the company, and the directors of that company can be held personally liable.
- If 62A or 62B apply, then HMRC also has the power to remove a subcontractor’s gross payment status. So going forward, any payments a customer makes to you will be subject to 20% CIS Tax. This will have cash flow implications, and if the customer’s contract insists you have gross payment status, then you could lose the contract altogether. What’s more, you can’t reapply for 5 years!
Could my gross payment status really be removed?
Removal of gross payment status is governed by s. 66 of CIS tax legislation (under the original Finance Act 2004). Under this, HMRC has broad powers to remove gross payment status if incorrect CIS returns are made, incorrect information is supplied, or even if HMRC consider the individual/business no longer meets the original qualifying criteria.
One of the original criteria is your general tax compliance, meaning if a director’s personal tax return, corporate tax return or VAT return is late, HMRC can choose to remove your CIS subcontractor gross payment status.
The new legislation will insert 66(3A), which is after the subsections that enable HMRC to remove gross payment status. As currently drafted, this new subsection broadly states that if the new 62(A) or 62(B) applies, then an individual/business, etc., cannot reapply for gross payment status for a period of 5 years.
What could be concerning is how HMRC will interpret this new subsection and its interaction with the existing 66(1)(c). This existing subsection broadly states HMRC may remove gross payment status for any deemed failure made under the CIS legislation.
Therefore, could the change lead to unintended consequences of more businesses being subject to a 5-year ban on gross payment status?
What actions could I take?
Control processes are key. A key risk to mitigate against is that you deem a payment to a subcontractor is outside the scope of CIS, but HMRC later deems it was within the scope of CIS all along. This scenario could fall within the new 62A/62B.
Understanding the rules and staff training will be key to ensuring this risk doesn’t materialise.
Other control areas to consider:
- Have you checked the individual’s employment tax status prior to considering CIS?
- Do you scrutinise labour and material splits? (only required if subcontractors don’t have gross payment status)
- Do you check whether contractors own or hire plant? And do you check if they pass on any markup on materials? (again, only required if subcontractors don’t have gross payment status)
- Do you re-verify subcontractors’ CIS tax status, particularly if there is a gap in service?
- Make sure HMRC has the correct address for your business and specifically the individual in charge of CIS. If HMRC issue a change to a subcontractor’s status to an incorrect address and you don’t action the change, HMRC consider this is the contractor’s problem. In the day of online portals, you should get a notification via your CIS online account, so again, make sure you keep checking.
For more information, please contact us here.
