New rules mean building contractors could be held liable for tax fraud committed by their subcontractors—even if they had no involvement in the fraud themselves.
From 6 April 2026, the government is introducing new rules that could see building contractors held personally responsible for tax fraud committed by their subcontractors—even if the contractor had no involvement in the fraud themselves.
These changes affect anyone who pays or receives payments under the Construction Industry Scheme (CIS). If you hire subcontractors or work as a subcontractor yourself, these rules apply to you.
The key change: Under the new rules, if HMRC decides you "knew or should have known" that a payment you made or received was connected to fraud, they can take action against you directly.
Currently, if a subcontractor in your supply chain commits tax fraud, that's their problem. From April 2026, it could become your problem too.
Under the new rules, if HMRC determines you "knew or should have known" that a payment was connected to fraud, they can:
This means you'll have 20% deducted from every payment you receive, seriously damaging your cashflow. You won't be able to reapply for GPS for five years.
Even though you didn't commit the fraud, you could be held liable for the tax that someone else in your supply chain failed to pay.
This penalty can be charged on top of the lost tax. Importantly, these penalties can also be charged personally to directors and officers of the company.
This is the critical question, and it's the part that creates risk for honest contractors.
You don't need to have actually known about the fraud. HMRC only needs to prove that a "reasonable person" in your position would have spotted that something wasn't right.
This is an "objective test"—your intentions don't matter, only whether warning signs were present that you failed to act on.
The principle is inspired by the "Kittel" principle in VAT law, where it has been used for years to hold businesses accountable for fraud in their supply chains.
The best defence against a "should have known" accusation is to demonstrate that you conducted proper due diligence on your subcontractors—and that you documented it.
HMRC's own guidance acknowledges that businesses which take reasonable steps to verify their supply chain are protected. The key is being able to prove what steps you took and when.
The principle is simple: If you can demonstrate you took reasonable care to check your subcontractors were legitimate, HMRC will find it much harder to argue you "should have known" about fraud.
This means establishing systematic due diligence procedures now—before the legislation takes effect—and maintaining records that show ongoing vigilance, not just a one-time check at onboarding.
HMRC published guidance on the new measures
Legislation passed into law
New rules come into effect
Tax Radar's CIS Compliance Suite helps you establish systematic due diligence procedures and create the documentation you need to defend against HMRC enquiries.