In every annual report HMRC has published since the formation of the Fraud Investigation Service, construction has appeared in HMRC's analysis as a strategic enforcement priority. The reasons are documented in the public record, and the strategic response has been visible for over a decade. FIS was given expanded CIS powers in 2017, again in 2021, and most recently in Finance Act 2026.
This article sets out why construction has become, and remains, one of the highest enforcement priorities for HMRC. It is written for procurement, finance, and supply chain leaders who want to understand the strategic context before deciding how seriously to take the April 2026 changes.
The short answer: the changes are best understood as the next step in a fifteen-year arc, not as a one-off legislative event. The longer answer is below.
For background on the tax technical framework, see our explainer on the April 2026 CIS changes. For the procedural mechanics of how an enquiry unfolds, watch out for our forthcoming article on what actually happens inside an HMRC CIS investigation.
HMRC publishes an annual estimate of the UK tax gap, broken down by tax type, taxpayer group, and behaviour. The construction sector is identified consistently in those publications as a material contributor to the gap, with a disproportionate share attributable to deliberate evasion rather than error or avoidance. The most recent published analysis is HMRC's Measuring tax gaps statistical release.
A few features of the construction sector explain why.
Sub-contracting density. A single major project will typically pass through three to five layers of contractor and subcontractor. Each layer is an opportunity for non-compliance to be inserted. Each layer is also an opportunity for the principal contractor to be insulated from direct knowledge of what is happening at the bottom.
Labour-only workforce structure. Large parts of UK construction operate on a labour-only subcontracting basis. The economic substance of much of this work is employment; the legal form is self-employment. The disjunction between substance and form is the structural enabler of CIS fraud. A genuine labour-only subcontractor is hard to distinguish from a contrived one without active investigation.
High volume of cash-equivalent transactions. Construction sits closer to a cash economy than most regulated UK industries. Payment to small subcontractors is fast, frequent, and often weakly documented. The audit trail is thinner than in sectors where payment runs through bank transfers and formal invoicing alone.
Short business life cycles. Construction subcontractors incorporate and dissolve at significantly higher rates than UK business averages. The structural background to phoenixism is the construction sector's tolerance of high company turnover.
Taken together, these features give HMRC a strong rational basis for the resource allocation it has chosen. The construction sector is where the unpaid tax is.
The Fraud Investigation Service was formed in 2015, consolidating several preceding HMRC units. Construction was identified, from the outset, as a strategic priority. The reasoning is set out in HMRC's published guidance on FIS and in the annual HMRC Annual Report and Accounts series available on gov.uk.
What changed in operational practice from 2015 onwards was the introduction of a more investigative, data-led approach to CIS compliance. The traditional CIS enquiry, focused on individual contractors, was supplemented by network analysis of supply chains, by the use of bulk Companies House data, and by closer co-operation between HMRC, the National Crime Agency, and the Insolvency Service.
The introduction of the VAT reverse charge for construction services, which took effect in March 2021 after a delayed rollout, was a first attempt to remove the financial incentive at the heart of one branch of CIS fraud. It worked, partially. It also displaced fraud toward other structures, including labour-only fraud, which the reverse charge does not address.
The 2021 changes to the GPS compliance test were a second attempt, tightening the conditions under which a subcontractor could hold Gross Payment Status. They have, again, worked partially.
Finance Act 2026 is the third attempt, and it is structurally different. The earlier rounds adjusted the regime to make existing fraud harder. The 2026 changes shift the burden of enforcement up the supply chain. They make the principal contractor responsible for what happens beneath it.
The argument HMRC has made publicly is straightforward. CIS fraud thrives in supply chains because the parties best placed to detect it have, until now, had no legal incentive to do so. A principal contractor benefits, commercially, from cheap subcontractor labour. The cheaper the labour, the higher the principal's margin. Some of that cheapness comes from genuine market efficiency. Some of it comes from non-compliance further down. The principal contractor has often had no reason to investigate which.
The new regime aligns the principal's commercial incentives with HMRC's enforcement objectives. Under sections 62A and 62B of the Finance Act 2004 (inserted by the Finance Act 2026), a principal contractor that "knew or should have known" of fraud in its supply chain becomes jointly liable for the unpaid tax and exposed to the immediate removal of Gross Payment Status. The principal now has a direct financial reason to look harder.
This is a recognisable enforcement structure. It was used for VAT in the Missing Trader Intra-Community fraud cases of the 2000s, first in Belgium under Kittel and then across the EU. The UK courts adopted it for VAT in Mobilx and refined it through Davis & Dann, Fonecomp, and Citibank. The body of case law that resulted is the playbook that construction now inherits. We have written about that inheritance in The Kittel Countdown.
The Fraud Investigation Service is the part of HMRC responsible for the most serious tax fraud cases. It runs both civil and criminal investigations. Its civil powers include Code of Practice 9 enquiries, and the full range of HMRC's information-gathering powers under Schedule 36 to the Finance Act 2008. Its criminal powers run to arrest, search, and the conduct of prosecutions through the Crown Prosecution Service.
FIS operates at scale, with specialist teams focused on construction, on labour-only fraud, on offshore structures, and on the cryptocurrency-related developments that have started to interact with traditional tax fraud structures. Its construction-focused work has historically been concentrated on the largest and most egregious cases. The April 2026 changes will allow it to widen the aperture.
Selection of cases. HMRC is not resource-constrained on legal grounds; it is resource-constrained on investigation grounds. It cannot pursue every contractor in the UK. It will pursue cases where the evidential return on investigation time is highest. In practice, that means cases where the principal contractor's file is weak enough to be readable quickly, and the underlying fraud is severe enough to justify the pursuit.
A principal contractor with a strong contemporaneous file is not safe in any absolute sense, but it is structurally less attractive as a target. A principal contractor whose file is reconstructed, partial, or missing is structurally more attractive. The decision to invest in compliance is, partly, a decision to be the kind of target HMRC's investigators de-prioritise.
Use of network analysis. HMRC's data capability has grown materially in the past decade. The Connect system, expanded since 2010, pulls data from a wide range of sources including Companies House, bank reporting, land registry, and increasingly third-party data providers. Network analysis allows HMRC to identify supply chains for investigation by starting at any point in them, including the bottom. A small subcontractor flagged by Connect can be the entry point for an investigation that ultimately reaches a major principal contractor several tiers up.
This is significant for the principal contractor's risk profile. The investigation may not start with you. It may end with you.
Timing of enforcement. Cases of this kind typically take eighteen months to two years from opening to resolution. The first publicly visible enforcement outcomes under the new regime will therefore appear during 2027 and 2028. Contractors who wait for those outcomes before adjusting their practices will be adjusting their practices under the pressure of an enquiry.
The strategic posture is set. The legislative framework is in place. The enforcement is coming. The variable that remains within a contractor's control is the quality of the file it produces if HMRC opens an enquiry. That file is the difference between a manageable outcome and a fatal one.
The practical answer is a continuous, contemporaneous record of subcontractor risk monitoring, backed by an audit trail HMRC's investigators recognise as adequate, producing a monthly Compliance Passport that demonstrates reasonable care was applied throughout the engagement. This is what Tax Radar's CIS Defence platform is built to produce.
The new regime applies to every CIS contractor. The investigations HMRC opens first will tend to be the largest, because the underlying tax at stake makes them efficient targets. But the legal test is the same at every scale. A regional contractor with twenty active subcontractors is, in principle, judged against the same "reasonable care" standard as a national contractor with two thousand. The only difference is the volume of evidence the contractor needs to produce.
The most useful conversation we have with a contractor is not the one where we describe HMRC's strategy. It is the one where we run their actual supply chain through CIS Defence and show them how their current position survives contact with that strategy.