The Construction Industry Scheme (CIS) is a UK tax system that applies to most construction work. It is used by the government to collect tax from people working in the construction industry. Under CIS, contractors must take tax off payments they make to subcontractors and send this money to HMRC. This is a legal responsibility and is explained clearly on gov.uk. The tax taken off counts towards the subcontractor’s tax bill.
From 6 April 2026, the government is making changes to how CIS works. These changes are being brought in to make the system clearer, reduce mistakes and stop fraud in the construction industry. Some of the new rules are meant to make things simpler, but others give HMRC more power to act when the rules are not followed.
It is very important that contractors understand these changes before they come into force. If CIS rules are not followed correctly, contractors can face fines, extra costs and cash flow problems. By learning what is changing now, you can prepare your business, avoid penalties and make sure you continue to pay subcontractors correctly and on time under the new CIS rules.
What is the Construction Industry Scheme (CIS)?
The Construction Industry Scheme (CIS) sets out the rules for how tax is handled when construction work is paid for in the UK. It applies to most types of construction activity, including building, repairs, decorating and civil engineering work. The scheme mainly affects contractors, who pay for construction work, and subcontractors, who carry out that work.
When a contractor pays a subcontractor, tax is usually taken off the payment before it is made. If the subcontractor is properly registered with HMRC, the deduction is normally 20% of the labour part of the invoice.
If they are not registered, the deduction increases to 30%. Materials are not taxed under CIS, but it is important they are clearly shown on invoices to avoid over-deduction.
Some subcontractors qualify for Gross Payment Status (GPS). This allows them to be paid in full, with no CIS tax taken off. According to gov.uk, GPS is only available to businesses that meet strict rules, including having a good tax record and reaching certain turnover levels. Losing GPS can have a serious impact on cash flow, which is why staying compliant is so important.
Contractors must report all CIS payments to HMRC using a monthly return. These returns must be accurate and submitted on time to avoid penalties. Any tax deducted under CIS is treated as tax already paid by the subcontractor and is taken into account when they complete their annual tax return.
Key 2026 CIS Reforms Explained
From 6 April 2026, several important changes to the Construction Industry Scheme will come into force. Some of these reforms are designed to make the system clearer, while others give HMRC stronger powers to deal with fraud and non-compliance. Below, we explain the key changes in simple terms and what they mean in practice for contractors.
Anti-Fraud Measures and HMRC Powers
One of the biggest changes coming in 2026 is HMRC’s increased power to act against fraud. Under the new rules, HMRC will be able to take action where a business has made or received payments that they knew, or should have known, were linked to tax fraud.
This is a major shift. HMRC will no longer need to wait for long investigations to finish before acting. If they believe there is a risk to tax revenue, they can step in straight away.
A key part of this change affects Gross Payment Status (GPS). From April 2026, HMRC will be able to remove GPS immediately if they suspect fraud. This means a subcontractor could suddenly start having tax deducted from their payments, even before a full investigation is complete.
HMRC will also be able to issue penalties of up to 30% of the tax they believe has been lost. On top of this, any business that loses GPS due to fraud will be barred from re-applying for five years, instead of the current one-year ban. This could have a long-term impact on cash flow and business reputation.
Why does this matter for contractors? Because HMRC expects businesses to take reasonable care. Even if you are not committing fraud yourself, working with the wrong people or ignoring warning signs could still put you at risk. Professional indemnity insurance protects against that.
Example:
A subcontractor has always submitted their returns on time and paid the correct tax. They begin working with a new company that later turns out to be bogus. Under the new rules, HMRC could remove the subcontractor’s GPS and apply penalties, even though they were not the main business behind the fraud.
Nil Returns Requirement
Another important change is the return of nil CIS returns. From April 2026, contractors will need to submit a monthly nil return if they have not paid any subcontractors during that month, unless they have already told HMRC in advance that no payments will be made.
Nil returns were removed in 2015, but HMRC is bringing them back. The aim is to reduce confusion and cut down on late filing penalties that are often issued by mistake when HMRC does not know a contractor has had no activity.
This change means contractors must be more organised. If you expect a quiet month with no subcontractor payments, you should tell HMRC beforehand. If you don’t, you will need to submit a nil return to confirm that no payments were made.
Failing to do this could lead to late filing penalties, even if no tax is due. This can be frustrating and costly, especially for smaller businesses or sole traders.
Practical tip:
Set a monthly reminder for your CIS return, even during quiet periods. Treat nil returns the same as normal CIS returns so nothing is missed.
Payments to Local Authorities and Public Bodies
From April 2026, certain payments made to local authorities and other public bodies will be fully exempt from CIS. This means contractors will not need to deduct tax or report these payments under the scheme.
In practice, this change puts into law what has already been happening in many cases. Until now, HMRC used a special concession that treated some public bodies as if they had Gross Payment Status. The new rules make this official and clearer for everyone.
For contractors, this change reduces paperwork and removes uncertainty. If you are paying a local council or another qualifying public body for construction-related work, those payments will sit outside CIS altogether.
This will be particularly helpful for contractors who regularly work on public sector projects, as it simplifies reporting and reduces the risk of mistakes.
Who benefits most?
Contractors and developers working with councils, housing authorities and other public bodies will see simpler tax treatment and fewer CIS reporting requirements.
Other Possible and Related Reforms
There are also other CIS changes being discussed that contractors should be aware of, even though not all of them will take effect at the same time.
One area under review is the “deemed contractor” rules. These rules decide when non-construction businesses must operate CIS because of the amount they spend on construction work. Changes here could mean that more businesses are brought into CIS, or that the rules are applied more consistently.
Another area involves clearer guidance on materials costs. HMRC is looking to tighten the rules on what can be claimed as materials and what should be treated as labour. This is aimed at stopping abuse, where labour is wrongly labelled as materials to reduce CIS deductions.
While some of these changes are still subject to consultation, they show the direction HMRC is moving in. Contractors should stay informed, as future updates could affect how payments are calculated and reported.
Understanding these reforms early gives you time to adjust your processes, speak to an accountant if needed, and make sure your business is ready well before April 2026.
How These Reforms Affect Contractors
The 2026 CIS reforms will have a direct impact on how contractors run their businesses. While some changes are meant to make the system clearer, overall the rules place more responsibility on contractors to get things right.
First, compliance becomes more important than ever. Contractors will need to be confident that the subcontractors they work with are properly registered, insured and operating within the rules. HMRC expects contractors to carry out reasonable checks and stay alert to possible signs of fraud. Failing to do so could lead to penalties, even if mistakes were not intentional.
There are also cash flow risks to consider. Penalties for non-compliance can be costly, and if a subcontractor loses Gross Payment Status, it may disrupt working relationships and payment arrangements. Contractors may also face unexpected deductions or delays if CIS rules are not followed correctly.
Choosing who you work with will matter more. Working with compliant subcontractors reduces the risk of problems later on. Taking shortcuts or ignoring warning signs could result in HMRC taking action against your business.
Reporting requirements will also increase. With the return of nil returns, contractors may need to submit a CIS return even in months where no subcontractors are paid. Missing a return, even when no tax is due, can still result in penalties.
Contractor Checklist
To prepare for the 2026 changes, contractors should:
- Make sure you are correctly registered for CIS
- Regularly check the CIS and GPS status of all subcontractors
- Set up monthly reminders for CIS returns, including nil returns
- Keep clear and accurate records of invoices, payments and materials
- Review internal processes to spot and reduce fraud risks
- Speak to an accountant or tax adviser if you are unsure about any part of CIS
Taking action now will help protect your business, avoid penalties and keep your cash flow steady under the new CIS rules.
Protect Your Business Before the 2026 CIS Changes Arrive
The CIS reforms coming into force from April 2026 are designed to make the system clearer while also giving HMRC much stronger powers to tackle fraud. Although some changes reduce confusion, others introduce new requirements that place greater responsibility on contractors to stay compliant. From tighter checks and tougher penalties to the return of nil returns, the impact on day-to-day operations should not be underestimated.
The key message is simple: preparation is essential. Contractors who understand the changes early will be better placed to protect their cash flow, avoid penalties and maintain strong working relationships with subcontractors. Now is the time to review your CIS processes, check that your reporting systems are up to date and seek advice from an experienced accountant if anything is unclear.
Alongside good tax compliance, having the right insurance cover is vital. ConstructionInsure.co.uk specialises in protecting contractors and construction businesses, helping you manage risk and stay focused on running your business with confidence.
Quick Questions Contractors Often Ask
Will the 2026 CIS changes affect small contractors as well as large firms?
Yes. The new rules apply to all contractors under CIS, including sole traders and small businesses. HMRC expects the same level of care and compliance regardless of business size.
Do these reforms mean I will pay more tax?
Not directly. However, mistakes, late returns or working with non-compliant subcontractors could lead to penalties or unexpected deductions, which can feel like higher costs.
What is the biggest risk for contractors under the new rules?
The biggest risk is not keeping up with reporting and compliance. Stronger HMRC powers mean issues can be acted on quickly, so staying organised and informed is essential.