HMRC has spent twenty years extending joint and several liability across VAT, directors, and umbrella companies. From 6 April 2026, construction contractors are formally in scope under sections 62A and 62B of the Finance Act 2004. Here is how HMRC got here and what it means for principal contractors.
Key takeaways
The new CIS regime is not new thinking. Sections 62A and 62B of the Finance Act 2004 import a twenty-year-old VAT doctrine into construction. HMRC has extensive experience applying this test.
Liability follows the deepest pocket. Every HMRC supply chain liability regime built in the last twenty years has done the same thing: identify who in the chain has the means to pay, and give HMRC a route to them. Construction contractors are the latest target.
Reasonable care is the test on the table. What a principal contractor verified, monitored, and documented in the ordinary course of business is what determines whether a section 62A or 62B notice lands.
On 6 April 2026, sections 62A and 62B of the Finance Act 2004 came into force. From that date, a principal contractor who pays a subcontractor in circumstances where it knew or should have known that the payment was connected with the fraudulent evasion of tax can be assessed for the lost tax, charged a penalty of up to 30% of it, and have its own gross payment status cancelled with no advance notice and a five-year wait before it can reapply. Directors and other connected persons can be charged the 30% penalty personally.
Most people in construction have heard the phrase “joint and several liability.” Far fewer have followed what HMRC has actually been doing with it over the last twenty years. The new CIS measures did not appear out of nowhere. They are the latest chapter in a strategy HMRC has been building, in different parts of the tax code, for two decades.
Here is what that strategy looks like, and why CIS was always going to be next.
Joint and several liability does one thing: it lets a creditor pursue any party in a group for the full amount owed, regardless of who was primarily responsible for the debt.
Every person named is independently liable for the full amount. Not their share. Not a proportion. The whole thing. If your name is on a notice, you owe the debt. The same is true of every other named individual, simultaneously, in full. HMRC will direct its enforcement efforts at whichever individual presents the clearest recovery prospect. Personal bank accounts, property, investment portfolios, and business interests are all in scope.
That is the mechanism. Here is how HMRC has been using it, in three distinct ways, each one an evolution of the last.
The longest-running use of supply chain liability in UK tax sits in VAT. There are two distinct mechanisms, and both matter for understanding what is now happening to CIS.
The first is statutory. Section 77A of the Value Added Tax Act 1994, inserted by the Finance Act 2003, makes a VAT-registered business jointly and severally liable for unpaid VAT in a supply chain involving specified goods, where the business “knew or had reasonable grounds to suspect” that the VAT on those goods would go unpaid. The provision was aimed squarely at missing trader fraud and applies to a defined list of high-fraud commodities, originally mobile phones and computer chips, later extended to related telephony and computer equipment. HMRC serves a notification letter first, and if no satisfactory explanation is provided, a notice of liability follows.
The second is the doctrine more relevant to construction. Following the European Court of Justice decisions in Kittel and Mecsek, HMRC has for over two decades operated a parallel power: where a taxable person “knew or should have known” that their transaction was connected with the fraudulent evasion of VAT, HMRC will deny input tax recovery on that transaction. Unlike section 77A, this principle is not limited to specified goods. It has been applied to construction labour supply chains repeatedly. Contractors have faced VAT denials running into seven figures on the basis that the red flags in their subcontractor chain were visible and the contractor either ignored them or chose not to look.
Whether you took reasonable steps to verify your supply chain is central to whether either power lands. If you took those steps, you have a defence. If you did not, you do not.
The VAT domestic reverse charge for construction services, in force since 1 March 2021, was introduced precisely because labour supply chain VAT fraud had become too systemic for case-by-case Kittel enforcement alone. That is not a sign that HMRC stepped back. It is a sign that the problem was big enough to legislate around.
Under Schedule 13 of the Finance Act 2020, HMRC can issue Joint and Several Liability Notices, or JSLNs, to directors, shadow directors, participators and others with significant influence over a company. A JSLN is not a general power to push any company tax debt onto an individual. It is available in three specific scenarios:
In each case HMRC must also be satisfied that the company is subject to an insolvency procedure or there is a serious possibility of one.
The most public-facing target was phoenixism. Directors who wind up one company with unpaid HMRC debts and immediately restart an almost identical business. HMRC is the largest creditor in the majority of corporate insolvencies, and the losses from phoenixism were significant. Schedule 13 was Parliament’s answer to that and to the related problem of insolvency-as-tax-planning.
The power reaches beyond obvious phoenixes. A shadow director, someone never formally appointed but whose instructions the board is accustomed to follow, can be held personally liable under a JSLN. If your influence shapes decisions, your job title offers no protection.
Crucially, unlike some other personal liability regimes in tax law, a JSLN does not merely create a secondary obligation that kicks in if the company fails to pay. It immediately establishes a co-primary liability for the full amount.
“The individual becomes a co-debtor with the company from the moment the notice is validly issued.”
The scale of exposure is illustrated by Hall v HMRC [2026] UKFTT 124 (TC), a January 2026 First-tier Tribunal decision involving a director issued a JSLN of £1.68 million under the phoenixism provisions of Schedule 13. The substantive hearing on the notice itself is yet to be determined, but in the procedural phase the Tribunal made a significant finding: that a JSLN amounts to a criminal charge for the purposes of Article 6 of the European Convention on Human Rights. In practical terms that shifts the burden, with HMRC having to establish a prima facie case that the conditions for issuing the notice were met. That is a meaningful protection, but the First-tier Tribunal does not set binding precedent, and the reasoning may yet be revisited on appeal. The direction of travel is telling, and the volume of JSLNs has been rising. HMRC confirmed via a freedom of information request that notices jumped from 16 in 2022/23 to 53 in 2023/24.
The third evolution came into force on 6 April 2026. The Finance Act 2026 inserts a new Chapter 11 into Part 2 of ITEPA 2003. Recruitment agencies and, where there is no agency in the chain, end clients are now jointly and severally liable for any PAYE and National Insurance that an umbrella company in the labour supply chain fails to pay over.
The reason this was needed tells you something important. Historically, HMRC’s recourse for unpaid PAYE where an umbrella company was involved sat entirely with the umbrella, but many umbrellas dissolved or phoenixed before liabilities could be collected. The answer, again, was to climb the chain to parties with deeper pockets and a continuing presence.
Under the new rules, when the umbrella doesn’t pay, HMRC can recover the full amount from the agency or, where there is no agency, the end client directly. And what matters is that the tax is paid, not that a business had a policy or a contract clause expecting it to be paid. You cannot contractually reassign your way out of a JSLN.
Look at those three chapters together and a single, consistent strategy emerges. Every time HMRC has encountered a problem recovering tax from the primary debtor, because they have dissolved, phoenixed, or simply don’t have the money, the legislative answer has been identical: extend joint and several liability to whoever is further up the chain with the means to pay.
VAT supply chains first. Directors of insolvent companies next. Labour supply chains after that.
“The trajectory is not subtle, and it has moved in one direction only.”
Every chapter has followed the same logic. Identify the deepest pocket in the chain, give HMRC a route to it, define the trigger as “knew or should have known”.
The Finance Act 2026, which received Royal Assent on 18 March 2026, inserts new sections 62A and 62B into the Finance Act 2004, the legislation governing the Construction Industry Scheme. The measures took effect on 6 April 2026. They are explicitly modelled on the VAT “knew or should have known” doctrine that has been operating in construction labour supply chains for two decades.
Where it can be shown that a business knew or should have known that a payment, or a CIS deduction claimed, was connected with the fraudulent evasion of tax, HMRC can now:
CIS has just joined the list. The mechanism is established. The enforcement capability is proven. The only thing new is that construction contractors are now formally in scope.
The contractors who will be in the clearest position are those who can demonstrate, with an evidence trail rather than a verbal assurance, that they verified their subcontractors, monitored their status continuously, and acted when something did not look right.
Building that evidence trail by hand is possible. So is keeping every subcontractor’s CIS verification status, forensic history, and risk indicators under continuous review across a portfolio of fifty active jobs. Neither is realistic in practice for a principal contractor of any scale. This is the gap CIS Defence was built to close, CIS compliance software built specifically for principal contractors in the construction sector. It runs the verification, the monitoring, and the documentation in real time and produces the evidence record HMRC would expect to see when “reasonable care” is the question on the table.
CIS Defence helps you establish systematic due diligence procedures and create the documentation you need to defend against HMRC enquiries.