From 6 April 2026, a contractor that pays a subcontractor when it knew or should have known someone in the chain would deliberately not pay CIS or PAYE can be made to pay 20% of that payment, plus a penalty of up to 30% of that amount which can be passed to its directors, and can lose gross payment status immediately for five years. Subcontractors claiming CIS credits they knew or should have known were not genuine face the same treatment, and contractors must now file nil returns.

What changed on 6 April 2026?

Finance Act 2026, sections 220 and 222, inserted new sections 62A to 62C into Part 3, Chapter 3 of the Finance Act 2004 with effect from 6 April 2026. HMRC’s policy paper “Tackling Construction Industry Scheme fraud”, published on 26 November 2025, says the measures were modelled on the VAT countermeasures against supply chain fraud and are aimed at businesses that knowingly engage with fraudulent businesses. In outline:

  • HMRC can make a business liable for tax lost further down the chain (section 62A) or for CIS credits it claimed (section 62B).
  • A penalty of up to 30% of that liability can be charged (section 72A), and can be transferred to company officers (section 72B).
  • Gross payment status can be cancelled immediately, with a five year bar on reapplying (section 66(3A)).

A separate package of administrative changes from the same date reinstated the obligation to file nil returns and took payments to local authorities and certain public bodies out of the scheme.

When can HMRC charge a contractor 20% of a payment?

Section 62A applies to a person who has made a payment under a construction contract and who, before making it, knew or should have known that a connected party had deliberately failed, or would deliberately fail, to make a CIS deduction, pay CIS deductions over to HMRC, or deduct or pay PAYE. A connected party is another party to the same contract, or a party to another construction contract relating to the same construction operations. That second limb reaches down the supply chain: a main contractor can be caught by a labour supplier two tiers below its own subcontractor.

Where the section applies, an HMRC officer may determine that the payer is liable for 20% of the payment. CISR85110 explains that the determination is made under regulation 13A of the CIS Regulations, is treated like an assessment for appeal and collection purposes, and is due 14 days after it is made, although postponement can still be requested on appeal.

What about subcontractors claiming CIS credits?

Section 62B targets the other side of the fraud. It applies where a person files a return containing a CIS deduction, for example on a Self Assessment return or an employer payment summary, and before filing knew or should have known that the deduction had not been made, or had not been or would not be paid over by the contractor. HMRC can determine that the person must pay an amount equal to the credit claimed. CISR85050 lists warning signs such as offers to reduce PAYE and National Insurance bills with purchased CIS credits, a claimant that is not in construction or not registered as a subcontractor, and invoices inflated to create the deduction.

What does “knew or should have known” mean?

CISR85060 says the phrase is not defined and is an objective test. For a company, HMRC will consider the knowledge of directors, company secretaries, employees and third parties such as agents and advisers involved in the transactions. A person “should have known” if the only reasonable explanation for the transaction was its connection with deliberate non payment; that does not mean no other explanation exists, only that no other is reasonable. HMRC’s guidance puts it bluntly: if a deal looked too good to be true, the business should have walked away or carried out a more thorough risk assessment.

CISR85030 lists indicators HMRC will look for, including:

  • unsolicited approaches from businesses with little or no construction history, or directors with no construction experience;
  • payroll companies or agencies with no physical or online presence;
  • prices below realistic labour costs, and repeat deals at the same or lower prices with a consistent profit;
  • instructions to pay third parties or offshore accounts, or use of alternative banking platforms;
  • identical invoice templates across different suppliers, wrong tax references, or no formal contracts on high value work;
  • excessive layers of subcontracting, and frequent changes of the entity supplying the same labour after earlier ones default or disappear.

How do the penalties and director liability work?

Under section 72A the maximum penalty is 30% of the amount determined, and it applies to payments made or credits claimed after 6 April 2026 (CISR85120 and CISR85130). Mitigation at CISR85140 is narrower than under the usual penalty regime:

Factor Maximum reduction of the penalty
Seriousness of behaviour None; no distinction between “knew” and “should have known”
Unprompted disclosure before HMRC can establish the liability, penalty accepted Up to 50%
Accepting HMRC’s findings after its fact finding Up to 20%
Not accepting the determination 0%
Helpful cooperation that saves HMRC time Up to 30%

A penalty cannot be issued more than three years after the regulation 13A determination became final. Under section 72B, HMRC can make a company officer liable for part or all of the company’s penalty where the company’s actions are attributable to that officer, which requires HMRC to show the officer personally knew or should have known. CISR85150 says directors have a responsibility to intervene even if they did not set up the arrangement, but accepts that a director with no involvement in contracts, who reasonably trusts a colleague and sees nothing suspicious in the results, would probably not be made liable. Our page on company officers’ liability for penalties covers the wider regime.

What happens to gross payment status?

Where section 62A or 62B applies, HMRC can cancel gross payment status immediately under section 66(3A) and register the business for payment under deduction. HMRC must give notice with reasons. CISR85210 confirms the business cannot reapply for five years from the date of cancellation, and that an appeal must be made in writing, stating the grounds, within 30 days. Before 2026 the bar on reapplying after cancellation was one year. The normal annual review tests still apply alongside this power; see CIS gross payment status: the tests.

What supply chain checks should contractors make now?

Verifying a subcontractor with HMRC only confirms registration and the deduction rate; it says nothing about the integrity of the chain. CISR85090 says HMRC does not prescribe a list of checks, but expects appropriate and proportionate due diligence, more extensive in a sector as vulnerable to fraud as construction, and warns that checks limited to the immediate subcontractor will not necessarily be enough. CISR85100 adds that making enquiries is not sufficient on its own: a business that finds a subcontractor has only just started trading, has a large income for its age, a poor credit rating or made an unsolicited approach, and still contracts without further enquiry, risks being treated as having gone through the motions. HMRC’s Guidelines for Compliance GfC12 on labour supply chain assurance sets out practical checks.

Illustration only. A main contractor receives an unsolicited offer from a new company to supply 20 operatives at a day rate below what its own payroll costs. The company was incorporated four months ago, its director has no construction background, and it asks for payment to a different entity’s account. Verification shows it is registered for payment under deduction. If the contractor goes ahead and the supplier fails to pay over PAYE, HMRC could argue that the only reasonable explanation was fraud, determine 20% of every payment made, and add a penalty of up to 30% of that figure. A file showing the contractor asked why the rate was so low, checked the director and the bank account, and declined to proceed is the evidence that answers that argument.

What administrative changes came in at the same time?

HMRC’s policy paper on simplifying CIS administration confirms two further changes from 6 April 2026:

  • Nil returns. Contractors must file a nil return for any month in which they pay no subcontractors, unless they have told HMRC in advance that no payments will be made. The obligation had been removed in 2015. Late filing penalties start at £100 for a return one day late.
  • Public bodies. Payments to local authorities and certain public bodies are taken out of CIS by a new regulation 24ZA, replacing an extra statutory concession that treated them as holding gross payment status.

For the monthly mechanics, see our guides to bookkeeping for CIS and deemed contractors, and the overview of the Construction Industry Scheme. Treating workers who are really employees as subcontractors is a separate risk, covered in CIS or PAYE for construction workers.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.