CIS Fraud Measures: A New Due Diligence Standard for Construction Businesses
Construction businesses have long operated under close scrutiny from HMRC. From frequent, and often lengthy employment status enquiries, to the introduction of the domestic reverse charge, the Joint and Several Liability (JSL) rules, VAT labour supply due diligence, and the Construction Industry Scheme (CIS) itself, the sector has seen a steady expansion of compliance expectations.
Now, with a renewed focus on tackling fraud within CIS supply chains, HMRC has introduced additional measures in an attempt to tackle fraudulent supply chains in the Construction Industry. To provide assistance and information as to how the new measures will be implemented, HMRC has now provided guidance on due diligence that will increasingly shape how businesses are assessed by HMRC during the course of their fraud investigation enquiries.
The Current Modus Operandi
Currently, where CIS deductions have not been properly accounted for, due to fraud, HMRC does not have the power to pursue recovery from other parties within the supply chain. The liability to pay any relevant CIS deductions over to HMRC sits with the contractor that was responsible for making the deductions.
In long supply chains, this could well (and HMRC believe that it does) lead to fraudulent behaviour from those contractors further down the supply chain – usually resulting in non-payment of the CIS deduction to HMRC.
HMRC believe that this must now be dealt with by a change to the CIS rules and has introduced this change to take effect from 6 April 2026. Our previous newsletter explaining the legislative changes and the potential ramifications for Contractors operating in the Construction Industry can be found here.
What’s Changing
HMRC have brought into law a requirement for Contractors operating in the construction industry to check their supply chains to ensure that any CIS deductions made down the chain are not part of an arrangement to defraud HMRC.
The legislation is drafted in similar terms to the case law that established the Kittel principle in VAT. The difference being that this is a statutory requirement rather than a case law principle. The legislation, essentially, holds those further up the supply chain responsible for missing CIS deductions, where the Contractor knew or should have known that the deductions due to be paid by subcontractors were not being paid to HMRC.
To assist businesses prepare for the change, HMRC has now published guidance setting out the principles of what it considers to be satisfactory due diligence in the context of CIS fraud. While not legally binding, this guidance provides a clearer set of principles for businesses to follow and is likely to play a significant role in future compliance assessments and disputes.
The context is similar, in many respects, to the existing VAT labour supply due diligence guidance, offering a more structured indication of HMRC’s expectations.
For businesses, this is a welcome development. It provides a clearer benchmark against which internal processes can be measured and improved.
Key Principles of Due Diligence
Rather than prescribing a rigid checklist, HMRC has set out a series of overarching principles. These include:
Proportionality
Due diligence checks should be appropriate to the size, nature, and risk profile of the business and its supply chain.
Informed Judgement
Businesses are expected to carry out sufficient checks to make a considered assessment of the integrity of their supply chain.
Supply Chain Visibility
Due diligence should not stop at direct contractual relationships. Businesses are expected to take reasonable steps to understand the wider supply chain.
Importantly, HMRC has also clarified how the “knew or should have known” test should be approached in practice:
- Due diligence must not be a purely procedural exercise. Businesses should not simply “tick boxes” but should actively engage with and respond to the findings of their checks.
- Indicators of potential non-compliance must not be ignored. Where red flags arise and no reasonable explanation is available, businesses are expected to take appropriate action.
This represents a clear shift towards a more substantive, risk-based approach to compliance.
What Should Businesses Do Now?
The publication of this guidance should be treated as a prompt for action. While it does not carry the force of law and tribunals will ultimately determine how the “knew or should have known” test is applied, it provides a strong indication of HMRC’s expectations.
Those in the construction sector should consider:
- Developing a tailored due diligence programme that reflects their specific operations and risk exposure.
- Aligning CIS due diligence with existing VAT and JSL processes to ensure a consistent and efficient approach.
- Seeking independent input or support where appropriate, particularly in higher-risk or more complex supply chains.
- For those operating at the lower end of the supply chain, preparing a clear and comprehensive due diligence pack to provide reassurance to clients.
A proactive and well-documented approach will not only strengthen compliance but also place businesses in a stronger position should HMRC scrutiny arise.
Final Thoughts
HMRC’s new guidance signals a continued tightening of expectations within the construction sector. Businesses that take the opportunity now to review and strengthen their due diligence processes will be better equipped to manage risk, demonstrate compliance, and navigate an increasingly complex regulatory landscape.
Disclaimer: Chartergate Legal Services Ltd has drafted this article to provide you with a general overview of the relevant law and developments at the date of publication only. It is not a substitute for professional advice that is specific to your circumstances and should not be relied upon as such.
