Five months into the new CIS fraud regime, silence does not mean safety

The UK quietly rewired the construction industry’s risk model this year.

Sections 62A and 62B of the Finance Act 2004, inserted by the Finance Act 2026, took effect on 6 April and apply to the Construction Industry Scheme (CIS), the system under which contractors deduct tax at source from payments to subcontractors.

The change is simple to state and uncomfortable to absorb. Where tax fraud sits anywhere in a contractor’s labour supply chain, and the contractor knew or should have known about it, the liability can now land on the contractor.

The consequences are severe. HMRC can recover the lost tax through a charge of 20% of the payments made, impose penalties of up to 30% that can be transferred personally to directors, and immediately cancel Gross Payment Status – the right to be paid without deductions – with a five-year bar on reapplying.

None of this was invented for construction. The “knew or should have known” standard is the Kittel test, established by the European Court of Justice in Kittel v Belgium in 2006 and domesticated by the UK courts in Mobilx v HMRC in 2010.

It has operated alongside joint and several liability in VAT supply chains under section 77A of the Value Added Tax Act 1994 for more than two decades.

HMRC has not built a new framework. It has airlifted a mature one into CIS with 20 years of case law behind it.

Five months in, there are no reported cases. Does that mean contractors everywhere are complying?

Having spent years inside HMRC investigations, I would say that would be lovely, but no. Enquiries are confidential and determinations take time to get to the tribunal, which is when they first become public.

HMRC’s published plan takes this into account. It expects the measures to raise £205m in the first year and more than £750m in total by 2031.

In its published guidance in the Construction Industry Scheme Reform Manual – set out before the regime began – section CISR85030 sets out the factors HMRC weighs when deciding whether a business should have known. I’ve seen compliance activity across the sector stepping up, and industry conversations suggest that questioning in live enquiries is beginning to track the language of the new legislation.

I would read those questions carefully. HMRC knows its charging options under the new sections before opening a conversation, and questions that look routine at the information gathering stage often lay the evidential ground for a determination later. What a business says now about its supply chain checks may well be quoted back.

This is what the early stage of a long enforcement cycle looks like. Quiet in public, moving underneath.

Two things stand out from the first six months. The first is how much policing burden has been quietly transferred to the industry, with contractors now effectively the compliance function for their own supply chains and little accompanying communication from HMRC.

A firm that does not follow tax policy closely could be six months into a liability regime it has barely heard of.

The second is the shift in the conversation. At the start of the year, the industry was asking what the legislation was. It is now asking whether it is exposed.

So what does reasonable care look like? HMRC’s guidance answers that itself. It will weigh a business’s general awareness of how CIS fraud operates, the specific features of payments or contracts that should have raised questions, and the due diligence actually carried out.

Due diligence that meets that standard is continuous rather than annual, runs across the whole subcontractor base, and covers the ground the tribunals have tested in the VAT case law, meaning verification against HMRC records, company status and director history, labour rates benchmarked against credible market data, and site-level reality checks.

Just as important is what happens when a check finds something. Identifying an adverse finding is not a failure. A concern that is spotted, considered, documented and resolved, with the actions recorded, is precisely the evidence the legislation was designed to produce, and it is judged on what the business did before any enquiry letter arrives, not after.

The first six months have not produced headlines. They have produced a pattern, and the businesses in the strongest position are the ones that acted early, updated their processes to acknowledge the new legislation and documented their due diligence properly. Watch this space.

Dan Lusted spent seven years at HMRC, including in the Fraud Investigation Service, and subsequently held a senior position in tax dispute resolution at a top five firm. He is co-founder of Tax Radar