Contractors face tougher CIS supply chain fraud sanctions from HMRC

Contractors will face significant fines or will be removed from tender processes if they fail to detect fraud in their supply chains under new tax rules.

Changes to the Construction Industry Scheme (CIS), which came into force this week, mean HMRC will be more proactive in enforcing fraud compliance among contractors and subcontractors.

The HMRC is under considerable pressure from the government to close the so-called tax gap between tax due and what is paid with a target set for £10bn more tax recovered by the body by 2029.

Under the rules a company that knowingly engages with those that deliberately evade tax or turns a blind eye to tax evasion will lose its gross payment status (GPS) with the HMRC for five years and may incur significant financial penalties such as paying out the associated tax loss and a fine of up to 30% of that amount. GPS status allows contractors not to pay tax liabilities of their subcontractors.

Tax and legal experts said the changes were significant and would mean companies would need to be much more vigilant in monitoring their operations and supply chain.

Joshua Clough, an associate at law firm Walker Morris, said the changes to the regime are a “high stakes game” for contractors given the risk of them losing their GPS status, It would impact both cashflow as well as prospects for future workload as having GPS is a requirement for many tenders processes.

Peter Graham, tax lead for real estate and construction, RSM UK, said: “This change puts huge pressure on construction companies to undertake the required due diligence to detect fraud throughout their entire supply chains and is a significant change from the previous CIS rules.”

Michelle Sloane, partner at law firm RPC, said contractors will need to be more hands on in managing agreements and contracts with subcontractors in future and not “leave them in a cupboard”.

“They need to be regularly reviewed and enhanced as this is risk based,” she added, saying that contractors would have to closely monitor any changes in their supply chain as well as staff changes within subcontractors.

Sloane said education within companies was crucial as the new rules will impact lots of different parts of the business “rather than just the supply chain”.

In addition to the tighter fraud measure there are two further changes to the CIS:

• Contractors will be legally obliged to file a monthly CIS return – known as a nil return - even if they did not use or pay a subcontractor or let the HMRC know in advance that they will not pay subcontractors that month by submitting an inactivity request. This requirement was removed in 2015 with the aim of reducing paperwork but having reviewed the implementation HMRC said it had not met those aims so it was reverting to the previous regime.
• Payments to local authorities and public authorities will be excluded from the CIS scope.

On the overall changes introduced this month an HMRC spokesperson said: “We continue to review how the Construction Industry Scheme (CIS) operates, balancing strong action against fraud and serious non‑compliance with efforts to simplify the scheme and reduce unnecessary burdens for compliant businesses.