HMRC CIS Enquiry: How to Deal With It (2026)
HMRC regards the Construction Industry Scheme as a high-risk area for errors and fraud, and from April 2026 it has significantly stronger powers to act on that concern — including holding contractors liable for fraud they didn’t even know was happening in their own supply chain. This guide from Filing Accounts UK explains what a CIS enquiry actually looks like, what changed in 2026, and how to respond if you receive one.
At Filing Accounts, we support contractors and subcontractors through HMRC CIS enquiries. For the broader compliance check process across all taxes, see our HMRC Compliance Checks guide.
Why CIS Attracts So Much HMRC Attention
CIS involves a lot of moving parts — verification, variable deduction rates, materials versus labour splits, gross payment status — and HMRC has consistently found this creates fertile ground for both genuine error and deliberate fraud. A CIS enquiry can start on its own, or emerge from a routine compliance check that uncovers something worth investigating further.
What HMRC Actually Looks At
Employment Status
This is consistently one of HMRC’s biggest areas of focus in construction: whether subcontractors treated as self-employed should genuinely have been on payroll instead. In construction, day-to-day working practices often don’t match what’s written on paper — fixed hours, single-client working, tools provided by the contractor — and HMRC actively looks for this mismatch. If subcontractors are reclassified as employees, the contractor can become liable for backdated PAYE, employer National Insurance, and penalties, on top of whatever CIS position needs correcting.
Gross Payment Status Compliance
If your business holds gross payment status, HMRC will check whether you still meet the qualifying tests — any slip in the compliance record can lead to suspension or withdrawal.
Materials vs Labour
CIS deductions only apply to labour, not to materials genuinely incurred by the subcontractor. HMRC will test whether a materials deduction on an invoice is realistic, or whether labour has effectively been relabelled as materials to reduce the CIS deduction — this is a genuinely technical area where disputes often get complicated.
Record-Keeping
HMRC expects thorough records — contracts, verification reference numbers, and payment and deduction statements. Missing paperwork or inconsistent records are a common reason a straightforward check turns into something more detailed.
What Changed on 6 April 2026: New Anti-Fraud Powers
This is the most significant CIS reform in years, introduced via Finance Act 2026, and it changes the risk profile for every contractor, not just those directly committing fraud.
The “Knew or Should Have Known” Test
Modelled directly on the VAT “Kittel” principle, HMRC can now hold a contractor liable for tax lost anywhere in its supply chain if the contractor knew, or should reasonably have known, that a payment was connected to fraudulent or non-compliant CIS activity — even where the contractor didn’t participate in the fraud itself. Carelessness, a lack of onboarding checks, or simply not asking obvious questions about a subcontractor can now be enough to meet this test. This isn’t limited to your direct subcontractor either; liability can potentially reach several tiers up a supply chain.
Immediate Loss of Gross Payment Status
Where HMRC concludes the test is met, it can withdraw a business’s gross payment status immediately, with no advance warning. Businesses that lose GPS this way can’t reapply for 5 years — a significant increase from the previous 12-month ban.
Tax Assessment and Penalties
Alongside losing GPS, HMRC can assess the business for the tax it believes was lost, plus a penalty of up to 30% of that lost tax. In some circumstances, these penalties can be applied to company officers and directors personally, not just the business itself.
HMRC expects these measures to generate more than £200 million in additional tax revenue during 2026/27 alone — a clear signal of how seriously this is being enforced.
What This Means in Practice: Due Diligence Now Matters
Supply chain verification can no longer be treated as a box-ticking formality. Practical steps worth taking now:
- Document your onboarding process for every new subcontractor, not just their CIS verification
- Watch for red flags — subcontractors operating from virtual offices, newly incorporated companies with no track record, or unusually complex invoicing structures
- Keep clear, dated records of the checks you actually carried out, not just the outcome
- Review your gross payment status compliance position periodically, not just when applying
- If you’re a subcontractor, ask your contractors about their own due diligence processes — their compliance failures can create knock-on problems for you too
What Happens During a CIS Enquiry
- Opening contact: HMRC sets out which periods and which aspect of your CIS position are under review
- Information request: contracts, verification records, payment and deduction statements, and evidence of your due diligence process
- Assessment of findings: HMRC decides whether deductions were correct, whether employment status was properly assessed, and whether gross payment status conditions were met
- Outcome: no change, an assessment for additional tax and penalties, or in serious cases, immediate withdrawal of gross payment status
A CIS enquiry frequently spreads into related areas — it’s common for a CIS-focused check to lead into further questions on VAT, PAYE, or Corporation Tax, given how closely these all interact for a construction business.
How to Respond
- Don’t try to handle it alone. CIS investigations are technical and adversarial, and businesses often unintentionally harm their own position by responding informally before understanding what’s actually being asked
- Get professional representation early — an adviser can manage correspondence, attend calls, and make sure nothing is said or provided that could be used against you unnecessarily
- Gather your own records before responding — verification numbers, contracts, and payment statements, so you understand your own position before HMRC’s deadline arrives
- Respond within the stated timescale, or request an extension before the deadline passes
CIS Enquiry Risks at a Glance
| Issue Found | Potential Consequence |
|---|---|
| Under-deducted CIS tax | Assessment for the shortfall |
| Subcontractors reclassified as employees | Backdated PAYE, employer NIC, and penalties |
| Supply chain fraud “knew or should have known” (from April 2026) | Immediate GPS withdrawal, tax assessment, penalty up to 30% — potentially personal to directors |
| GPS compliance failure | Suspension or withdrawal of gross payment status |
| Poor record-keeping | Adjustments or penalties, harder to defend other findings |
Common Mistakes to Avoid
Treating Supply Chain Checks as a Formality
Under the “should have known” test, a lack of process is now itself a risk, even without any deliberate wrongdoing on your part.
Responding to HMRC Informally Before Getting Advice
Early, informal answers can unintentionally narrow your options later in the enquiry.
Assuming Gross Payment Status Is Permanent Once Granted
HMRC reviews compliance conditions on an ongoing basis, and from 2026 can withdraw GPS immediately in serious cases, with no advance warning.
Not Documenting Due Diligence at the Time
Being able to genuinely demonstrate the checks you carried out, with dates and records, is now central to defending your position under the new rules.
Frequently Asked Questions
Can HMRC hold me liable for fraud I didn’t know about?
Yes, from 6 April 2026, if HMRC concludes you “should have known” about fraudulent activity in your supply chain, even without direct involvement.
Can gross payment status be withdrawn without warning?
Yes, where HMRC believes the new fraud test is met, GPS can be removed immediately, with a 5-year ban on reapplying.
Can penalties fall on me personally as a director?
Yes, in some circumstances under the 2026 rules, penalties connected to supply chain fraud can be applied to company officers individually, not just the business.
What’s the biggest focus area in a typical CIS enquiry?
Employment status — whether subcontractors treated as self-employed should genuinely have been on payroll — is consistently one of HMRC’s top areas of focus.
Can a CIS enquiry lead to a VAT or PAYE enquiry too?
Yes, it’s common for a CIS-focused check to uncover issues that lead into related VAT, PAYE, or Corporation Tax questions.
Facing a CIS Enquiry? Talk to Filing Accounts UK
With HMRC’s new supply chain liability powers now in force, how you respond to a CIS enquiry matters more than ever. At Filing Accounts, we support contractors and subcontractors through CIS enquiries, from the first information request through to resolution.
You may also find these related guides helpful: