Construction Industry Scheme – Tackling fraud

The construction industry has long been subject to tax evasion/fraud and there have been several attempts over the years. 

Arguably the Treasuries greatest move to counteract tax underpayment in the construction industry was the implementation of the Construction Industry Scheme (“CIS”) regime in the UK in 1971. Under CIS, contractors deduct tax from payments to subcontractors and pay it to HMRC as an advance towards the subcontractor’s tax liability. Registered subcontractors are subject to a 20% deduction, while unregistered ones face a 30% rate. Subcontractors can apply for gross payment status, which allows them to receive payments without any CIS deductions if they meet certain business and compliance criteria. 

As a further effort to limit tax avoidance and evasion, in April 2024 the CIS gross payment tests was bolstered by the addition of VAT compliance to the requirements necessary for a business to achieve CIS gross payment status. However, serious offences continue to pose a significant risk in the industry. 

Budget 2025 announced new measures to further assist HMRC in tackling fraud and non-compliance in the construction industry by applying measures to the CIS regime that HMRC has found very useful in counteracting VAT evasion – the VAT context referred to as the Kittel principle.

Budget 2025 announced that new measures will come into effect from 6 April 2026, under which, if HMRC can show that a business “knew or should have known” that it entered into a transaction connected with fraudulent evasion of tax, HMRC will be empowered to:

• Immediately cancel the gross payment status of that taxpayer;
• Make the business who entered into the transaction connected to fraud liable for the lost tax; and
• Apply a penalty of 30% of the lost tax chargeable to the business, directors and/or persons connected to the business.

In addition, once gross payment status has been removed, the time limit to reapply has been increased from one year to five years. 

Many businesses in the construction industry rely on their gross payment status for cashflow purposes so the impact of losing such status for five years is a significant deterrent and should encourage businesses to challenge those subcontractors in their supply chain to provide sufficient due diligence. 

Whilst the Construction Industry Scheme already puts an substantial administrative burden on businesses with monthly returns, subcontractor verification and payments to HMRC, businesses will now need to review their existing supply chains and refresh their due diligence and also update their onboarding processes to ensure they are obtaining sufficient due diligence to satisfy themselves that the transactions in their supply chains do not result in the fraudulent evasion of tax. 

In the same way as they have done with VAT, IR35 and (shortly) umbrella company supplies, HMRC is seeking to avoid tax losses by seeking recovery from those higher in the supply chains where those businesses have not done enough to ensure that no fraudulent transactions are occurring.