Worked Example (illustrative scenario)

How a small construction firm prepares for CIS reforms from April 2026

A practical walkthrough of how the April 2026 CIS reforms affect a 15-person residential construction business with 8-12 active subcontractors. Covers enhanced fraud powers, nil return changes, and the compliance steps needed to protect Gross Payment Status.

Change event: CIS reform: GPS fraud powers, nil returns, and public body exemptions Effective 6 April 2026

The scenario

Hartwell Construction Ltd is a small residential and light commercial construction firm based in Reading. The company has been trading for 11 years and employs 15 full-time staff: 3 office administrators (including the owner-director), 2 site managers, 8 directly employed tradespeople (carpenters, bricklayers, groundworkers), and 2 apprentices.

Like most small construction firms, Hartwell uses subcontractors extensively. At any given time, they work with 8-12 active subcontractors across specialist trades: electricians, plumbers, plasterers, roofers, scaffolders, and skip hire. Around 60% of subcontractors are regular relationships they have worked with for years; the remainder are brought in for specific projects.

Hartwell holds Gross Payment Status (GPS), allowing them to receive payments from main contractors without CIS deductions. This status is vital for their cashflow — losing it would mean 20% deductions on every invoice from upstream contractors, creating significant working capital pressure.

Their typical projects include residential extensions, loft conversions, garage conversions, and small commercial refurbishments (retail fit-outs, office conversions). Contracts range from £30,000 to £250,000, with monthly turnover averaging £180,000.

Staff
15 employees, 8-12 active subcontractors
Structure
Limited company, established 2015
Annual turnover
~£2.2 million
Compliance deadline
6 April 2026

GPS fraud powers: the biggest risk

For Hartwell Construction, the enhanced fraud powers introduced in April 2026 represent the most significant compliance risk. Under the new rules, HMRC can immediately cancel Gross Payment Status if a business "knew or should have known" that payments made or received were connected to fraudulent tax evasion.

The phrase "should have known" is deliberately broad. It means that even if Hartwell had no actual knowledge of fraud in their supply chain, they could still be penalised if HMRC concludes they failed to carry out adequate due diligence on subcontractors.

The consequences are severe:

  • Immediate GPS cancellation — no warning period, instant loss of gross payment status
  • Direct tax liability — HMRC can assess Hartwell for the full unpaid tax in the fraudulent supply chain, even if they were not directly involved
  • 30% penalties — charged on the lost tax, potentially tens of thousands of pounds
  • Five-year GPS ban — up from one year previously, making it virtually impossible to trade in construction during that period
  • Director liability — penalties can extend to company directors personally

For a business like Hartwell, losing GPS would be catastrophic. With typical monthly cashflow of £180,000, a 20% CIS deduction from main contractors would withhold £36,000 per month — money that would only be recovered months later through Corporation Tax. Most small construction firms cannot absorb that level of working capital disruption.

Assessing the supply chain risk

The owner-director, Mark Hartwell, met with the company's accountant in January 2026 to assess their exposure. The accountant explained that HMRC's "knew or should have known" test focuses on due diligence processes: what checks did you carry out before engaging each subcontractor, and were they appropriate for the level of risk?

Hartwell reviewed their current 12 active subcontractors against a risk framework:

Low risk (6 subcontractors):

  • Long-standing relationships (5+ years)
  • Established local businesses with physical premises
  • Hold their own GPS or have stable CIS verification history
  • Direct relationships with no labour intermediaries

Medium risk (4 subcontractors):

  • Newer relationships (less than 2 years)
  • Mix of employed staff and further subcontractors
  • One or two layers of subcontracting visible

Higher risk (2 subcontractors):

  • Labour-only arrangements (no materials component)
  • Pricing significantly below market rates
  • Bank account details changed recently
  • Unclear how they source their workforce

The accountant advised that under the new rules, continuing to work with the two higher-risk subcontractors without enhanced due diligence could trigger the "should have known" test if fraud was later discovered in the supply chain.

Building a due diligence process

Hartwell Construction implemented a new three-tier due diligence process between January and March 2026:

Tier 1: Universal checks (all subcontractors)

  1. CIS verification — Already standard practice, but now documenting verification number and date for every subcontractor
  2. VAT registration check — For subcontractors charging VAT, verifying VAT number using HMRC's online checker. One subcontractor was found to be charging VAT without a valid registration — relationship terminated immediately
  3. Companies House search — For limited companies, checking: company status is active, directors match the people Hartwell deals with, registered address is genuine (not a virtual office), accounts are filed up to date
  4. Bank account verification — Confirming bank account matches business name. Payment requests to third-party accounts are now a red flag

Tier 2: Enhanced checks (medium and high risk)

  1. Physical premises visit — For new subcontractors or those with unclear business operations, visiting their office or yard. Is there genuine business activity? Are workers present?
  2. Reference checks — Requesting contact details for other main contractors they work with and following up by phone
  3. Supply chain mapping — For labour-only or complex arrangements, asking direct questions: who provides your workers? Are they employed or subcontracted? Are there further layers below you?
  4. Insurance verification — Requesting copies of public liability and employer's liability insurance. Legitimate subcontractors carry insurance; fraudulent shell companies often do not

Tier 3: Ongoing monitoring (all relationships)

  1. Invoice review — Cross-checking invoices against work actually done. Round-number invoices or inconsistent pricing trigger investigation
  2. Annual re-verification — Re-running Companies House and CIS verification checks at least once per year for all active subcontractors
  3. Change monitoring — Flagging any changes in bank details, company directors, or trading patterns for immediate review
  4. Incident logging — Recording any concerns identified and actions taken, even if resolved

Outcome of enhanced due diligence: One of the two higher-risk subcontractors could not provide satisfactory answers about their labour sourcing or explain why their bank account name did not match their business name. Hartwell terminated the relationship in February 2026. The second higher-risk subcontractor passed enhanced checks and was retained, but with ongoing quarterly monitoring.

Nil return changes: administrative impact

The second April 2026 change affects Hartwell's monthly CIS filing obligations. Currently, if Hartwell makes no payments to subcontractors in a given tax month (rare, but happens occasionally during quieter periods like Christmas or when all active projects use directly employed staff), they can request an inactivity period from HMRC. During inactivity, no monthly returns are required.

From 6 April 2026, the inactivity system is replaced with a new rule: contractors must either file a nil return OR notify HMRC at least 14 days before the start of the tax month that they will not be making any subcontractor payments. If they do neither, automatic late filing penalties apply.

Practical impact for Hartwell: In a typical year, Hartwell has 1-2 tax months with no subcontractor payments (usually December-January when office refurbishment work pauses). Previously, they requested a 6-month inactivity period covering the winter. From April 2026, they must either:

  • File nil returns for those months (takes about 5 minutes online), or
  • Notify HMRC by the 22nd of the month before (e.g., by 22 November if they expect no payments in December)

The challenge is that construction work is unpredictable. A project might complete earlier than expected, meaning a subcontractor invoice arrives in a month Hartwell thought would be nil. If they pre-notified HMRC but then made a payment, they would breach the rules and face penalties.

Hartwell's solution: Default to filing nil returns rather than pre-notifying. It takes minimal time and avoids the risk of pre-notification becoming inaccurate due to unexpected payments. The office administrator adds "CIS return check" to her calendar on the 15th of every month, ensuring returns are filed by the 19th deadline whether payments were made or not.

Public body exemption: no practical impact

The third April 2026 change exempts payments to local authorities and certain public bodies from CIS scope entirely. For Hartwell Construction, this has no practical impact — they do not typically work directly for local authorities. Their public sector work comes via main contractors who handle the local authority contract, so Hartwell's invoices are still to private companies subject to CIS.

However, the exemption clarifies a grey area. On one occasion in 2024, Hartwell carried out urgent repairs directly for a local parish council. Under the old rules, this technically fell under CIS, but the council (not being a construction business) did not operate CIS deductions. From April 2026, such payments are explicitly out of scope, removing potential compliance ambiguity.

Steps taken to prepare

Hartwell Construction began preparation in early January 2026, giving themselves three months to implement changes before the 6 April deadline. The timeline looked like this:

January 2026: Assessment and planning

  • Half-day meeting with accountant to understand the changes and assess compliance risk (accountant fee: £450)
  • Risk profiling of all 12 active subcontractors using the three-tier framework
  • Decision to implement enhanced due diligence before April rather than waiting for HMRC enforcement

February 2026: Enhanced due diligence implementation

  • Companies House searches for all 8 limited company subcontractors (free, ~3 hours of office admin time)
  • VAT registration checks for 10 VAT-registered subcontractors (discovered 1 fraudulent VAT registration, relationship terminated)
  • Physical premises visits to 4 medium/high-risk subcontractors (site manager time, ~1 day total)
  • Reference checks via phone calls to other contractors (office admin time, ~2 hours)
  • Documented due diligence files created for each subcontractor, stored electronically with annual review dates set

March 2026: Process embedding and training

  • Updated subcontractor onboarding checklist to include all Tier 1 and Tier 2 checks before first payment
  • Briefing session for site managers on fraud warning signs to watch for on site (unusual worker turnover, workers not matching the subcontractor's description, reluctance to provide documentation)
  • Set up monthly CIS return calendar reminder (15th of each month) to ensure nil returns filed when needed
  • Legal review of enhanced due diligence process by solicitor to ensure it meets HMRC expectations (solicitor fee: £800)

Total cost: Approximately £2,150 in professional fees (accountant £450, solicitor £800, additional accountancy support £900), plus around 50 hours of internal time spread across the director, office administrator, and site managers. Hartwell estimates the internal time cost (staff hours at average rates) at approximately £1,200.

Total investment: £3,350 — roughly 0.15% of annual turnover. However, the director views this as essential insurance. Losing GPS would cost £36,000 per month in withheld cashflow, making a £3,350 investment to protect GPS seem trivial by comparison.

Impact on subcontractor relationships

The enhanced due diligence process required honest conversations with subcontractors. Mark Hartwell wrote to all active subcontractors in January 2026 explaining the April changes and what additional information Hartwell would need from them.

Subcontractor reactions:

  • Established subcontractors (6): No problems. They understood the compliance requirements and provided requested documentation (UTR confirmation, Companies House numbers, insurance certificates, references) without complaint
  • Medium-risk subcontractors (4): Some initial pushback ("we've worked together for 18 months, why do you suddenly need all this?"), but all eventually complied. One was slightly offended by the premises visit but accepted the explanation that HMRC requires contractors to evidence due diligence
  • High-risk subcontractors (2): One could not or would not provide satisfactory documentation. When pressed on bank account discrepancies and labour sourcing, they became evasive. Hartwell terminated the relationship. The second passed checks after providing detailed explanations and documentation

The subcontractor who was terminated complained that Hartwell was "over the top" and accused them of unfair treatment. Mark's response was clear: "Under the new rules, if you're involved in fraud and we should have spotted the warning signs, we lose our Gross Payment Status for five years. I can't take that risk with anyone I'm not confident about."

Importantly, Hartwell documented this decision process in writing, including contemporaneous notes of conversations and the specific red flags identified. If HMRC ever investigates, Hartwell can demonstrate they took the warning signs seriously and acted on them.

Professional fees
£2,150 (accountant, solicitor)
Internal time cost
~£1,200 (50 hours staff time)
Subcontractor relationships terminated
1 (fraud risk indicators)
Total compliance investment
£3,350 (0.15% of turnover)

💡 Lessons for similar businesses

Start due diligence now, not after HMRC investigates: Hartwell began in January 2026, three months before the April deadline. Businesses waiting until March found it harder to complete premises visits and reference checks in time. Early action also allowed time to replace the terminated subcontractor before the busy spring season.

Document everything: Creating a due diligence file for each subcontractor is not just good practice — it is your defence if HMRC investigates. Include: verification numbers and dates, Companies House searches, VAT checks, bank account confirmations, premises visit notes, references contacted. If a warning sign appears, document what you investigated and why you proceeded (or did not proceed).

Do not ignore red flags to preserve relationships: Mark Hartwell admitted the hardest decision was terminating the subcontractor who had worked well on previous jobs but could not explain bank account discrepancies. "It felt harsh, but under the new rules, one bad relationship in my supply chain could cost me GPS for five years. That is an existential risk for a business like ours."

The "should have known" test is subjective: HMRC will ask: were your checks proportionate to the risk? For long-standing, established subcontractors with stable track records, basic checks may suffice. For labour-only arrangements, unusual pricing, or complex supply chains, enhanced checks are essential. Risk-based due diligence is key.

Nil return changes are low-burden if you prepare: Filing a nil return takes 5 minutes online. The mistake is forgetting the deadline exists. Set recurring calendar reminders for the 15th of every month to check whether a return is needed. Software can automate this entirely.

Budget realistically for professional advice: Hartwell spent £2,150 on accountant and solicitor fees to ensure their due diligence process was robust. For a small construction firm, this is a modest investment compared to the catastrophic cost of losing GPS (£36,000/month cashflow impact in Hartwell's case).

Communicate with subcontractors: Explaining why you need additional information helps preserve relationships. Most legitimate subcontractors understand HMRC is tightening enforcement. Frame requests as "we need to protect our GPS so we can keep working together" rather than "we suspect you of fraud."

ℹ️ Scotland, Wales, and Northern Ireland

The Construction Industry Scheme operates UK-wide. The April 2026 changes to GPS fraud powers, nil returns, and public body exemptions apply equally in Scotland, Wales, and Northern Ireland.

However, some public sector construction procurement operates under devolved frameworks. Scottish, Welsh, and Northern Irish local authorities and public bodies are included in the public body exemption from CIS scope.

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