Spot Fraud with New CIS Measures or Face Tax Penalties

New rules under the Construction Industry Scheme came into force from Monday. They require contractors to be far more vigilant about fraudulent activity in their supply chains.

Immediate consequences for firms

Companies found to have known, or been in a position where they should have known, about fraudulent transactions face swift action. HMRC can revoke a firm’s gross payment status for at least five years.

Directors may also face personal penalties. Losing gross payment status can force firms to deduct taxes at source and damage their ability to secure large contracts.

How the financial mechanics work

• Subcontracting firms may be required to pay 20–30% of agreed fees directly to HMRC.
• HMRC can hold contractors liable for lost tax, including PAYE and National Insurance, evaded by subcontractors.
• The Revenue may also apply a penalty up to 30% of the tax lost to fraud.

Expert concerns and industry impact

Peter Graham, tax lead for real estate and construction at RSM UK, warned that losing gross payment status harms competitiveness. He said firms can face heavy fines and be made to cover tax shortfalls.

Tyra Ali of Markel Tax said the rules are now challenging for contractors. She warned that automated HMRC checks and wider tax coverage leave little margin for error.

Due diligence expectations

Lawyers at Charles Russell Speechly stressed that ignorance is no defence. Firms are advised to carry out thorough due diligence on trading partners.

Recommended checks include CIS verification, VAT registration, company and director records, and bank account ownership. David Sharp, partner at Rouse, said structured onboarding creates a clear audit trail.

The legal precedent: ‘should have known’

The “should have known” concept follows the Kittel principle from a 2006 European Court of Justice ruling. That case involved Axel Kittel acting as receiver for Computime in Belgium.

HMRC uses the principle to infer knowledge where transactions look contrived or unusually advantageous. Its CIS reform manual says weak due diligence can support allegations of knowing involvement in fraud.

Calls for proportionate enforcement

Barbara Bento of Buzzacott warned that long, fragmented supply chains make exhaustive checks difficult. She urged greater weight be given to a firm’s prior compliance history.

Tyra Ali also said contractors should not be forced to act as fraud investigators. She recommended firms focus on evidencing reasonable care at the time of engagement.

Practical takeaway for contractors

Firms must tighten onboarding and recordkeeping. A structured approach can reduce the risk of losing GPS.

Contractors must Spot Fraud with New CIS Measures to avoid Face Tax Penalties. Clear checks and documented compliance will help demonstrate reasonable care.