Daniel Lusted, co-founder of Tax Radar, explains what principal contractors can do to protect themselves in the wake of new regulations which make them jointly liable for tax lost through fraud committed by supply chain subcontractors
I spent several years in HMRC’s Fraud Investigation Service, working cases across many industries, including construction.
The job was pattern recognition: a single indicator was rarely a smoking gun, it was the accumulation that told the story. A price that made no commercial sense, an entity that kept changing, invoices that did not quite hold together. In construction, those patterns sat two or three tiers below the principal contractor, whose own payments looked compliant. Until this year, that was usually where the matter ended.
What changed on 6 April
New Sections 62A and 62B, added to the CIS legislation by the Finance Act 2026, came into force on 6 April. They make a principal contractor liable where HMRC can show it knew or should have known that a payment was connected to a deliberate failure to pay CIS or PAYE anywhere in its supply chain. Not a share of the fraudster’s debt. A determination raised against the contractor itself.
The test is not new: it derives from the European Court of Justice’s 2006 decision in Axel Kittel v Belgian State, developed by the Court of Appeal in Mobilx Ltd in 2010. The test is objective: a business is treated as knowing where the only reasonable explanation for a transaction was a connection to fraud. HMRC need not prove participation or benefit.
What it costs
A principal contractor is now exposed on three fronts. First, a determination of 20% of the payment made, even where it met its own obligations in full. Second, a penalty of up to 30% of that determination, which HMRC can transfer to a company officer personally. Third, immediate cancellation of gross payment status, with no notice and a five year bar on reapplying.
In cash terms, that is 20% deducted at source from what the business is paid, for at least five years. For a business built on gross receipts, the working capital impact starts immediately and runs for years.
The assessment itself is paid out of net profit, not turnover. At a 3% margin, a £150,000 assessment (illustrative) requires £5 million of replacement turnover to restore the position. At 5%, £3 million. Contractors think in margin.
HMRC’s enforcement intent is explicit too. The UK tax gap stood at £59.2 billion in 2024-25 (Measuring Tax Gaps, June 2026).
Budget 2025 costings scored £25 million in 2025-26, before the measures took effect. In 2026-27, their first year in force, HMRC expects £205 million, and £740 million over the five years to 2030-31. That fits my experience: HMRC does not wait for commencement dates. The groundwork for the first enquiries will have been laid in advance.
What an enquiry actually gathers
HMRC’s manual, CISR85030, sets out three strands: what the contractor knew about compliance risk in its chain, the features of payments and contracts that should have raised questions, and the due diligence carried out.
The indicators include suspiciously low prices, excessive layers of subcontracting, frequent changes of entity supplying the same labour, and invoice irregularities. Several only emerge as patterns over months. An onboarding check cannot surface them.
HMRC’s impact note says the measure should not affect compliant businesses carrying out proper due diligence. Due diligence is both the standard and the defence: a documented trail across the life of a job.
Under enquiry, a contractor must show what was checked, when, what it showed, what concerns arose and what was decided. Dated, named and contemporaneous.
The record matters even where a business did nothing wrong. In Cheema Construction Services Ltd v HMRC [2025] UKFTT 92 (TC), a VAT case on the same test, a construction business won on connection, not on paperwork: the tribunal found parts of its due diligence lax. Nearly three years passed between penalty notice and decision, with a personal penalty on the director running alongside and a hearing bundle of 5,788 pages.
A file that answers the question is what stops an enquiry becoming that.
What contractors can do now
The practical response does not require wholesale change. It starts with ownership: clear responsibility for supply chain risk within the finance function.
Processes then need updating so subcontractors are checked thoroughly and regularly, not only at onboarding, labour rates benchmarked against what the work genuinely costs, and red flags investigated rather than explained away.
Each check and decision is recorded at the time, building a file that can be produced if HMRC asks.
In practice, this legislation moves the policing of construction supply chains onto the finance director’s desk. It arrived largely under the radar. It will not stay there: tribunal decisions are published, and HMRC’s use of these powers will soon be clear for all to see.
• Daniel Lusted is co-founder of Tax Radar, which builds CIS compliance software for principal contractors. He spent several years in HMRC’s Fraud Investigation Service, latterly as an operational lead, before working as an associate director in tax dispute resolution at BDO.
