From 6 April 2026, HM Revenue & Customs (HMRC) is introducing powerful new measures under the Construction Industry Scheme (CIS) that dramatically increase accountability for fraud in the supply chain. For the first time, contractors can be held liable for tax losses caused by fraudulent activity further down the chain (or up) — even if they had no direct involvement.
The changes, announced in the 2025 Budget and now confirmed in legislation, align CIS compliance more closely with the well-established VAT “Kittel” principle. HMRC will apply a “knew or should have known” test. In plain English: if HMRC believes you should reasonably have spotted red flags in your supply chain, you could face immediate loss of Gross Payment Status (GPS), full liability for the tax evaded, and penalties of up to 30% — potentially falling on both the business and its directors.
At DBM Accountancy Ltd, we work with hundreds of London-based contractors, developers and subcontractors who rely on CIS. These reforms represent the biggest shift in CIS compliance in over 20 years. Here’s what every construction business needs to know — and what you should be doing right now.
What Exactly Is Changing?
Under the new rules, HMRC can act immediately where a business “knew or should have known” that a payment made or received under a construction contract was connected to fraudulent evasion of CIS tax (or related PAYE). This covers situations such as:
- Subcontractors who fail to deduct or pay over CIS tax
- Fake or missing entities in the supply chain
- Repeated patterns of non-compliance with no commercial explanation
The test is deliberately broad. HMRC will look at whether you carried out proper due diligence, monitored ongoing relationships, and responded to obvious warning signs. General press coverage of widespread CIS fraud, industry warnings, or unusually favourable terms with unverified suppliers could all be relevant.
Additional powers include:
- Immediate cancellation of Gross Payment Status (no notice period in fraud cases)
- Extended re-application ban — five years instead of one
- Recovery of lost tax from the business that entered into the transaction
- Penalties up to 30% of the tax lost, chargeable on the business, directors and connected persons
In short, “turning a blind eye” is no longer an option. HMRC expects proactive supply-chain governance.
Why These Changes Matter for Contractors
Many of our clients hold Gross Payment Status because it improves cash flow. Losing it for five years could be devastating — forcing you to operate on a 20% or 30% deduction rate and chasing repayments from HMRC.
Even businesses that operate entirely legitimately are at risk if a subcontractor (or their subcontractor) is later found to be part of a fraudulent chain. The burden of proof effectively shifts: you will need clear evidence that you took reasonable steps to prevent abuse.
This is not just a “big contractor” issue. SMEs and mid-tier firms in the supply chain are equally exposed, especially those working with labour agencies, one-person bands, or rapidly changing subcontractor lists.
Practical Steps to Protect Your Business
The good news? Compliant businesses that strengthen their processes now will be in the strongest position. Here’s what we’re recommending to all our construction clients:
- Review and enhance due diligence processes. Move beyond basic CIS verification. Conduct ongoing risk assessments, credit checks, site visits, and reference checks for key subcontractors. Document everything.
- Map your supply chain. Understand who is really working on your sites and who is being paid. Many frauds hide behind multiple layers.
- Train your team. Make sure project managers, commercial teams and accounts staff recognise CIS fraud warning signs (e.g. unusually low rates, rapid turnover of companies, cash requests).
- Maintain robust records. HMRC will expect evidence that you acted reasonably. Cloud-based systems that link supplier checks to payments make this much easier.
- Consider technology and specialist support. Automated CIS compliance tools and regular independent reviews can provide an audit trail that demonstrates reasonable care.
How DBM Accountancy Ltd Can Help
At DBM Accountancy Ltd, we specialise in cloud accounting and tax compliance for SMEs in the construction sector. Our team is already helping clients prepare for these changes through:
- Comprehensive CIS health checks and supply-chain risk assessments
- Tailored due diligence templates and procedures
- Director training sessions on the new “should have known” test
- Ongoing compliance support and monthly reporting reviews
- Representation in the event of any HMRC enquiries
We don’t just file your returns — we help you build systems that protect your business and give you peace of mind.
Don’t Wait Until April 2026
These rules come into force in just a few weeks (from the date of this article). The construction industry has faced increasing HMRC scrutiny for several years, but this latest reform raises the bar significantly.
If you’re a contractor, subcontractor or developer and you haven’t yet reviewed your CIS processes in light of these changes, now is the time.
Contact the team at DBM Accountancy Ltd today for a no-obligation CIS compliance review. We’ll help you understand your current exposure and put practical, cost-effective safeguards in place before the new rules bite.
📞 Call us on +4402080165636 or email [email protected] to book a consultation
DBM Accountancy Ltd – London-based cloud accountants helping construction businesses stay compliant, efficient and profitable.
This article is for general information only and does not constitute professional advice. Tax rules can be complex and are subject to change. Please speak to your accountant for advice tailored to your specific circumstances.
(Last updated: April 2026)