CIS REFORM 2024-2026: What Construction businesses need to know

The Construction Industry Scheme

Established under the Finance Act 2004, the Construction Industry Scheme (CIS) was introduced to reduce tax evasion within the construction sector. The scheme requires contractors to deduct either 20% (for registered subcontractors) or 30% (for unregistered subcontractors) from subcontractor payments and remit these amounts directly to HMRC. Subcontractors can, however, apply for Gross Payment Status (GPS), which allows them to receive payments in full without deductions and manage their own tax affairs.

Acquiring GPS is highly attractive as it improves cashflow, signals financial and commercial reliability, and is sometimes a prerequisite for securing contracts. As a result, the loss of GPS can have serious practical and financial consequences for construction businesses.

The 2024 Reforms

Prior to April 2024, subcontractors seeking Gross Payment Status (GPS) were required to demonstrate compliance only in respect of their direct tax returns and CIS. However, from 6 April 2024, the compliance test has been tightened, requiring subcontractors to now also ensure that all VAT returns and payments are accurate and submitted on time in order to obtain and maintain GPS.

This measure also expands the grounds for HMRC to immediately cancel GPS, now including where there are reasonable grounds to suspect fraud relating to VAT, Corporation Tax, Income Tax, or PAYE. This represents a notable shift towards stricter, more interventionist compliance oversight.

The 2024 reforms also introduced changes to clarify the CIS treatment of payments from landlords to tenants. Many such payments are now excluded from the scope of CIS, provided that:

• the payment relates to works obligations under a lease.
• the occupying tenant carries out the works themselves or contracts a third party to do so; and
• the works are undertaken primarily for the benefit of the tenant

While intended to bring greater certainty, HMRC has adopted a narrow interpretation of “primary benefit” and the burden is on the landlord to prove the work benefits the tenant alone. Consequently, landlords must be cautious, particularly where works affect the fabric of the building or may confer a direct benefit on the landlord or other tenants, as such payments may still fall within CIS.

Changes effective from April 2026

From 6 April 2026, the prospective reforms will further strengthen HMRC’s powers to respond to suspected fraud within the CIS supply chain. HMRC will be able to intervene where, under their discretion, a business knew, or should have known, that a payment it made or received was connected to fraudulent activity. Where this test is met, HMRC may immediately withdraw GPS, recover any associated tax loss, and impose penalties of up to 30%. In some cases, directors may also face personal liability. The reforms also propose extending the GPS re‑application period from one year to five years, signalling a clear move towards stricter enforcement and the expectation that businesses actively prevent fraudulent arrangements.

The Government’s move towards a more proactive compliance environment is further reflected in the proposal to reintroduce the requirement for contractors to file nil returns in months where no subcontractor payments are made, unless HMRC has been notified in advance. Although the obligation was removed in 2015 to ease administrative burdens, the Government has concluded that its removal has resulted in a higher volume of erroneous late‑filing penalties. The reintroduction aims to improve accuracy and reduce avoidable compliance failures.

The final proposed change is the exclusion of payments to local authorities and public bodies from the scope of CIS. Previously, these bodies have been treated as holding GPS under an extra-statutory concession, and the reforms simply formalise this exemption. While this is unlikely to materially affect day‑to‑day operations for most contractors, it should offer greater clarity and simplicity when dealing with public sector clients.

The Key Risks and How to Prepare

Next week’s reforms place a greater responsibility on contractors and subcontractors to proactively monitor their operations and their supply chains. HMRC may now intervene based on conduct that businesses, or their employees, should have identified as connected with fraud. To reduce risk, you should ensure that staff at all levels receive regular training on common fraud indicators, such as unusual payment arrangements, inconsistent subcontractor details, or sudden changes in supply‑chain structures.

You should also revisit and enhance your supply chain due diligence processes. This may include undertaking director and shareholder checks, verifying VAT registration details, monitoring Companies House filings for irregularities, and ensuring subcontractors’ CIS and VAT compliance aligns with your own internal records. Contract reviews should also form part of your preparation: consider updating your agreements to include strengthened GPS warranties, fraud‑prevention obligations, indemnities, and clearer information‑sharing provisions across the chain.

Internally, businesses should put systems in place to automate reminders for CIS nil‑return deadlines, especially for months where subcontractor payments are not expected. Building in routine CIS and VAT reconciliation audits will also help identify discrepancies early and support a robust governance framework capable of withstanding HMRC scrutiny.

Effective preparation is critical. The consequences of breaching the updated CIS rules are increasingly severe and will often lead to the immediate loss of GPS status. Where the penalties for non-compliance are harsh and unforgiving, it is prudent for those affected by the scheme to act now to ensure compliance.

How we can help

The reforms mean that CIS compliance is no longer simply a monthly tax exercise; it is now a contractual, operational and governance issue that businesses cannot afford to overlook which requires active compliance.

To help you minimise the risk of financial penalties, reputational harm and potential contractual breaches, we can support you in ensuring full compliance with the evolving regulatory framework. Our team can review and update contracts for specific projects, or assist in bringing your current suite of contract documents in line by incorporating appropriate VAT and CIS warranties, reinforce GPS related obligations, and strengthen information‑sharing provisions across your supply chain.

Having good governance practices, strong internal controls and confident staff are a necessity to spot and escalate risks early. We can support you by delivering focused training teams, tailored to the level of knowledge and responsibility of your staff to help mitigate the upcoming change.

We can also assist in developing practical CIS governance processes, including verification cycles, enhanced record‑keeping procedures, monitoring of HMRC notifications, and streamlined internal workflows designed to reduce compliance risk. Businesses that invest now in refining contractual agreements, conducting internal CIS reviews and bettering their understanding of the regulations will ensure their business will reap the benefits of these reforms whilst avoiding non-compliance penalties.

Please get in touch with our construction team for further information.