The Construction Industry Scheme (CIS) has always required careful attention, but April 2026 introduced a clear turning point in how HMRC expects contractors to manage compliance.
Significant legislative changes are now in force, and HMRC activity targeting incorrect CIS deductions is continuing. Together, these developments raise the stakes for construction businesses operating with subcontractors and signal a move away from reactive compliance towards active supply‑chain risk management.
For many contractors, CIS compliance is no longer just about applying the right deduction rate - it is about demonstrating control, governance and ongoing oversight.
HMRC activity: incorrect CIS deductions firmly in focus
HMRC continues to actively target CIS contractors where its data suggests incorrect CIS deductions may have been applied. As part of its compliance approach, HMRC has been issuing letters to contractors asking them to review CIS verification and deduction rates used in recent CIS returns.
While these letters are not formal compliance checks, they are a clear warning sign. HMRC expects contractors to take prompt action to review their records and correct any errors. Where issues are identified later by HMRC, any mistakes are likely to be treated as prompted, increasing the risk of penalties.
A critical point for contractors is that the liability sits with them and HMRC will pursue the contractor for CIS tax that should have been withheld. Whilst the contractor may be relieved of the liabilities where HMRC are satisfied the income has been returned and the appropriate taxes paid by the subcontractor, this is not guaranteed and is often refused, leaving the contractor to foot the bill. This activity reflects HMRC CIS data use, cross checks and targeted interventions across the construction sector.
Key CIS changes now live from April 2026
From April 2026, changes to the Construction Industry Scheme have introduced new obligations and significantly tougher consequences for non‑compliance.
1. Enhanced HMRC powers and the “knew or should have known” standard
HMRC now has expanded powers where a contractor knew or should have known that it was involved in a transaction connected to CIS fraud somewhere in its supply chain.
Where this standard is met, HMRC can:
- Recover the tax loss
- Apply penalties of up to 30% of the tax involved
- Immediately withdraw Gross Payment Status (GPS)
- Prevent reapplication for GPS for up to five years
This is a substantial shift. Losing GPS for five years can severely restrict cashflow and damage supply chain relationships, a pressure point closely linked to protecting wider financial headroom.
The emphasis is no longer only on individual transactions, but on whether businesses have reasonable processes in place to identify and manage risk.
2. Mandatory monthly CIS nil returns reinstated
From April 2026, contractors are required to submit monthly CIS returns even when no subcontractor payments are made, unless HMRC has been notified in advance of a planned dormant period.
This reinstates full monthly reporting discipline. Where nil returns are missed, penalties can arise automatically, making ownership of CIS reporting and controls essential.
3. Public sector payments now outside CIS
Payments to local authorities and certain other public bodies are now fully outside the scope of CIS. This replaces earlier concession‑based treatment and removes the need for unnecessary deductions and reporting on qualifying public‑sector contracts.
Accuracy remains key - incorrectly applying CIS where it does not apply can create avoidable administration and disputes.
4. Gross Payment Status under greater scrutiny
VAT compliance has already been part of the criteria for maintaining Gross Payment Status. The consequences of GPS withdrawal are now significantly more severe under the April 2026 rules.
Contractors must ensure they:
- Monitor subcontractor status changes
- Update CIS records promptly
- Apply the correct deduction rates at the right time
Failing to reflect a change in subcontractor status can leave the contractor liable for CIS tax that should have been deducted.
What these changes mean for construction businesses
The direction of travel is that HMRC now expects contractors to take active responsibility for CIS compliance across their supply chains.
In practical terms, contractors need to demonstrate that they:
- Verify subcontractors correctly before payment
- Keep CIS records accurate and up to date
- Monitor subcontractor status over time
- Maintain clear internal ownership of CIS processes
- Have reasonable controls and governance in place
Under the new rules, lack of awareness is no longer a defence if risks could reasonably have been identified.
What contractors should be doing now
Whether or not you have received correspondence from HMRC, contractors should be:
- Reviewing subcontractors included in CIS returns over the past 12 months
- Re-verifying current CIS status and deduction rates through proper CIS verification
- Ensure the materials costs accurately reflect the direct cost of materials incurred by the subcontractor, particularly where plant and equipment such as scaffolding has been provided
- Correcting errors through amended CIS300 returns where required
- Reviewing onboarding and approval procedures for new subcontractors
- Strengthening documentation, internal checks and reporting responsibility
Proactive action can significantly reduce exposure if HMRC scrutiny increases.
We’re here to help
Azets works with construction businesses across the UK to support CIS compliance, risk reviews and HMRC enquiries, as part of our wider Property and Construction industry expertise.
If you would like support reviewing your CIS position, please get in touch with our Employment Tax team via the form below.