Construction Industry Scheme

Tackling fraud in the Construction Industry Scheme (CIS) was one of the measures addressed in the recent Budget. The changes are intended to allow faster intervention where fraud is suspected, while also simplifying certain administrative aspects of the CIS.

From 6 April 2026, HMRC will be able to act immediately where a business makes or receives a payment that it knew, or ought to have known, was connected to fraud. In these cases, HMRC will have the authority to withdraw Gross Payment Status (GPS) straight away, assess the business for any related tax loss and impose penalties of up to 30%. Penalties may apply to the business itself or, in some circumstances, to its officers. Where GPS status is removed due to fraud or serious non-compliance, the business will also be prevented from reapplying for five years, a significant increase from the current one-year restriction.

The government also announced plans to simplify the operation of the CIS. Planned changes include exempting payments made to local authorities and certain public bodies from the scheme and reinstating the requirement for contractors to submit nil returns. These measures are expected to take effect from 6 April 2026, following a period of technical consultation.

The CIS applies special tax and National Insurance rules to construction businesses, with contractors generally required to deduct tax from payments made to subcontractors. Deduction rates depend on whether the subcontractor is registered and whether they hold GPS, which allows payment without deductions.

As part of the Budget measures, the government confirmed plans to make some changes to the Construction Industry Scheme (CIS).

From 6 April 2026, HMRC will be able to take immediate action where a business makes or receives a payment that it knew, or should have known, was connected to fraud. In these circumstances, HMRC will have the power to remove Gross Payment Status (GPS) with immediate effect, assess the business for the associated tax loss, and impose a penalty of up to 30%. This penalty may be applied to the business itself or to its officers. Where GPS is withdrawn due to fraud or serious non-compliance, the business will also be barred from reapplying for GPS for a period of five years (an increase from the current one-year limit).

Alongside these measures, the government also plans to simplify the CIS by exempting payments to local authorities and certain public bodies. As part of this change the requirement for construction contractors to submit nil returns will be required. These changes are due to take effect from 6 April 2026 and will first be subject to technical consultation.

The CIS is a set of special tax and National Insurance rules for businesses operating in the construction industry. Under the scheme, businesses are classed as either contractors or subcontractors, and both must understand their tax obligations.

Qualifying contractors are required to deduct tax from payments made to subcontractors and pass these deductions to HMRC. The amounts deducted count as advance payments towards the subcontractor’s tax and National Insurance liabilities.

Subcontractors are not required to register for the CIS, but where they are not registered, contractors must deduct tax at a higher rate of 30%. Registered subcontractors are subject to a 20% deduction unless they qualify for GPS. Where GPS applies, no deductions are made by the contractor, and the subcontractor is responsible for paying all tax and National Insurance at the end of the tax year.

To qualify for GPS, a subcontractor must meet specific criteria, including a strong compliance history of paying tax and National Insurance on time, and carrying on a business that undertakes construction work or supplies construction labour in the UK.

The Construction Industry Scheme (CIS) comprises a set of special rules for tax and National Insurance for those working in the construction industry. The scheme applies mainly to contractors and sub-contractors involved in construction. However, certain businesses that are not in the business of construction but have a significant amount of annual spend may also count as contractors.

Before making a first payment to a subcontractor the contractor must confirm that the subcontractor is known to HMRC, registered within CIS and obtain details of their payment status. This is known as 'verifying the subcontractor'. A contractor or their appropriate representative can go online to carry out this verification using a number of different methods.

The verification is necessary so that the contractor can ascertain whether or not a deduction should be made from the subcontractor's payment and, if so, at what rate. If the subcontractor is not registered for the CIS, then contractors must deduct 30% from their payments. If the subcontractor is registered, then either a 20% deduction is taken, or the subcontractor can apply for gross payment status. If the subcontractor has gross payment status, they are responsible to pay all their tax and National Insurance at the end of the tax year.

Once verified, the contractor only needs to re-verify the subcontractor if they have not paid the same subcontractor within the current, or two previous, tax years.

The Construction Industry Scheme (CIS) is a set of special rules for tax and National Insurance for those working in the construction industry. Businesses in the construction industry are known as ‘contractors’ and ‘subcontractors’. Under the scheme, contractors deduct money from subcontractors’ payments and pass it to HMRC.

Contractors are defined as those who pay subcontractors for construction work or spent an average of more than £1m a year on construction over a three-year period. Subcontractors do not have to register for the CIS, but contractors must deduct 30% from their payments to unregistered subcontractors.

The alternative is to register as a CIS subcontractor where a 20% deduction is taken or to apply for gross payment status, where the contractor will not make any deductions and the subcontractor is responsible to pay all their tax and National Insurance at the end of the tax year.

The CIS covers all construction work carried out in the UK, including jobs such as:

• site preparation
• alterations
• dismantling
• construction
• repairs
• decorating
• demolition

Exceptions to the definition of construction work includes professional work done by architects and surveyors, carpet fitting, scaffolding hire (with no labour) and work on construction sites that’s clearly not construction. The CIS does not apply to construction work carried on outside the UK.