Construction Industry Scheme (CIS) changes

The start of a new tax year coincides with several significant changes under the Construction Industry Scheme (CIS).

New anti-fraud rules

Following the announcement in the 2025 Budget, new measures have been introduced to tackle fraud in the construction sector.

The measures apply to two main scenarios as follows:

A person makes a payment under a construction contract, and before making the payment knew or should have known that a relevant person in the supply chain has deliberately failed or would deliberately fail to deduct CIS tax, pay CIS tax to HMRC, or deduct and pay PAYE.
A person makes a return claiming CIS deductions and before doing so knew or should have known that the CIS deduction had either not been deducted or paid to HMRC.

Where the measures apply, HMRC will be able to:

Charge the business who made the payment 20% of the amount paid.
Charge the business who claimed the CIS deduction 100% of the CIS credit claimed.
Apply penalties of up to 30% of the lost tax to the business or its officers.
Immediately cancel the subcontractor’s Gross Payment Status (GPS), with a five-year wait to reapply.

Although introduced primarily to stop known supply chain fraud models and modelled on the well-established VAT Kittel principle, the new legislation is written widely and could inadvertently impact housing associations.

Who knew what and when

Recently issued guidance from HMRC makes clear that when assessing whether a person knew or should have known that there would be a deliberate failure in the supply chain, HMRC will look at factors including:

Evidence of the person’s general knowledge of deliberate compliance failures that could occur in the supply chain when the transactions took place.
Features of the payments and contracts that would have led the person to question whether they were connected to deliberate compliance failures.
Due diligence and risk assessments carried out by the person to identify and address any risks identified.

HMRC’s view of warning indicators include:

Excessive layers of the supply chain resulting in labour costs only being feasible if tax is not being paid.
Suspiciously low prices, which appear too good to be true.
High value work with no formal contracts.
Directors lacking construction experience.

These changes sitting alongside the ‘joint and several liability’ provisions for ‘umbrella companies’ (that can result in unpaid PAYE/NIC being transferred to agencies or end users), and the agency and IR35 legislation, increase the importance of strong labour supply chain controls.

Nil returns are back

Further changes are also being made from 6 April 2026. Firstly, mainstream contractors (including development companies) will be required to submit a monthly CIS return (even if it’s a nil return) in every tax month unless an inactivity period is pre-notified to HMRC. This removes the previous ability to automatically appeal nil-return penalties.

Secondly, payments to certain public bodies (including housing associations) will be exempt from the CIS. Development subsidiaries paying their parent housing association for construction work will no longer need to apply the CIS to these payments.

What should housing associations do?

We recommend that organisations review all their CIS and labour supply chain controls and strengthen them where there are significant risks of compliance failings.

As part of this review, it will be important to:

Document your due diligence and escalation procedures.
Ensure your CIS compliance routines align with wider labour supply chain governance, including IR35 and umbrella company risk management.
Apply enhanced checks for higher risk arrangements.
Train your staff on the risks and the processes used to control them.

Further support

If you would like specific help and advice on any of the changes highlighted here, or if there are any CIS matters that you would like the NHF to raise with HMRC via its membership of the HMRC Construction Forum, please contact Simon Thurston.