The government explained in the Autumn Budget 2025 that serious non-compliance in the construction sector continues to develop and remains a significant tax loss risk, including sophisticated fraud by criminals.
In response, and as part of their efforts to close the tax gap, HMRC announced in November 2025 that they would be cracking down on Construction Industry Scheme (CIS) users who knowingly enter into transactions connected to fraud by enforcing much harsher measures and lowering the bar for blame.
The punitive measures for non-compliance that came into force on 6 April 2026 are:
- The immediate cancellation of Gross Payment Status (GPS) with no ability to reapply for 5 years.
- Ensuring that the business who entered into the transaction connected with the fraud is liable to the lost tax even if they are not the evading party.
- A penalty of 30% of the lost tax may be charged to the business as well as its directors and other connected persons even if they are not the evading party.
HMRC hopes that these changes will ensure businesses undertake the necessary due diligence to prevent illegitimate operators entering the market and estimates that these measures will collect an extra £765 million in revenue by 2030/31.
Who is at risk?
Businesses operating or transacting in the construction industry.
The burden of proof for non-compliance is significantly reducing and is being modelled on the Kittel principle. This principle has long been used to successfully tackle VAT supply chain fraud which is why HMRC are now applying it to CIS.
The Kittel principle means that if it can be shown that a business knew or should have known that they entered into arrangements that were connected to the fraudulent evasion of tax, then the new measures will apply.
This means that the business does not have to have actively participated or even benefited from the fraud to be subject to these new measures. It is a clear message to those within the supply chain that they will no longer be able to turn a blind eye to suspicions. Businesses must keep thorough records of the due diligence that they perform to ensure that they are meeting the Kittel test.
The Kittel test is objective and is applied by reference to what a reasonable person in the position of the taxpayer business, with the knowledge and experience they had or ought to have had, would have concluded.
What should I do now?
If you are operating and transacting with CIS businesses, you will need to ensure that you have robust due-diligence and anti-fraud procedures in place for your entire supply chain as compliance expectations have materially increased. This will not only apply at the start of transactions, but you will also need to prove that you are continually monitoring your relationships for their duration.
At Menzies we can assist you with your CIS compliance. Read more about how here.
Worried that your business may have been involved in a fraudulent supply chain?
We previously wrote about what to do if you receive a CIS nudge letter from HMRC which requires actioning right away.
However, if HMRC have not yet contacted you, that does not mean that you should do nothing and wait. If you come to learn that you have made mistakes in CIS returns then you may first wish to check if you can rectify the position by amending previously filed returns. Alternatively where you did not realise CIS returns were due for example, a notification can instead be made to HMRC that the business intends to make a disclosure under the Digital Disclosure Service. A disclosure should then be prepared for all years that are within the scope of HMRC assessment. We will work with you to determine which course of action is available and most suitable given the specific circumstances of your case.
If any CIS or employer liabilities have been deliberately evaded, then you should consider whether the Contractual Disclosure Facility (Code of Practice 9 or “COP9”) may be more appropriate and seek guidance from a COP9 specialist, such as Menzies’ Tax Disputes and Disclosures team.
If you need support responding to HMRC, filing CIS returns, or making a disclosure on behalf of a company, contact the Menzies Tax Disputes and Disclosures team today.
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