HM Revenue & Customs (HMRC) has issued updated compliance guidance for the construction sector, clarifying the severe financial penalties facing businesses linked to tax fraud within their supply chains.
The updated factsheet, CC/FS96, published on 15 September 2026, outlines how the tax authority will use powers introduced under the Finance Act 2026 to target deliberate non-compliance in the Construction Industry Scheme (CIS).
Under these rules, HMRC can hold a business liable for tax losses even if the firm was not the primary fraudster, provided they “knew or should have known” that a transaction was connected to the fraudulent evasion of VAT or other taxes.
The ‘Knew or Should Have Known’ Test
The guidance focuses on sections 62A and 62B of the Finance Act 2004. These sections allow HMRC to issue determinations to recover unpaid tax and apply additional penalties when a contractor or subcontractor is found to be involved in a fraudulent chain.
Section 62A enables HMRC to recover 20% of a payment from a contractor if it is determined that the payment was connected to tax fraud. Crucially, the “should have known” element acts as an objective test. It means that if a business fails to carry out reasonable due diligence on its suppliers, it can be held legally responsible for the fraud committed by others in its supply chain.
Section 62B targets individuals or businesses that claim CIS credits which they knew, or should have known, were never actually deducted or paid to HMRC.
Penalties and Personal Liability
Where HMRC issues a determination under these sections, a penalty of up to 30% of the tax due can be charged. This is in addition to the recovery of the original tax amount.
The guidance also reinforces that these penalties are not necessarily limited to the corporate entity. If the non-compliance is deemed deliberate, HMRC has the power to transfer the liability for these penalties directly to company directors or officers. This means individuals can be held personally liable for the financial failings or fraudulent connections of their companies.
Loss of Gross Payment Status
For many construction firms, the most immediate threat is the impact on their Gross Payment Status (GPS). Under the CIS, GPS allows businesses to receive payments from contractors without any tax being deducted at source, which is often vital for maintaining cash flow.
The updated guidance confirms that any business found liable under these sections may have its Gross Payment Status cancelled immediately. Once GPS is revoked under these circumstances, the business is typically barred from reapplying for a period of five years.
For a mid-sized or large contractor, the move from gross payment to a 20% or 30% deduction can cause significant liquidity issues, potentially affecting the ability to pay staff and suppliers on time.
Practical Steps for Businesses
To protect against these penalties, HMRC advises construction firms to maintain rigorous due diligence processes. This includes:
• Regularly checking the VAT and CIS registration status of all subcontractors.
• Investigating supply chains that appear to offer goods or services at significantly lower than market rates.
• Documenting all checks and decisions made when onboarding new suppliers or entering into new contracts.
HMRC maintains that these measures are necessary to level the playing field for honest businesses and to remove the financial incentive for organised tax fraud within the UK’s construction industry.