Reform of the Construction Industry Scheme: Targeting deliberate non-compliance under s.62A FA 2004

There are a number of practical issues which arise from new Construction Industry Scheme (CIS) legislation relating to deliberate non-compliance measures. Here we analyse the new measures and consider the challenges they create for contractors and sub-contractors.

What is the background to the measures included in the Finance Act 2026?

The introduction of section 62A of the Finance Act 2004 marks a shift in HMRC’s approach to enforcement within the CIS. This new legislation extends responsibility beyond a person failing to deduct or pay tax to those who ignore or fail to carry out due diligence. However, as currently drafted, and with the guidance available to date, the rules go further than many might have expected and could unexpectedly capture additional parties.

What are the measures?

Section 62A of the Finance Act 2004 applies to a person who:

• makes a payment under a construction contract; and
• before making the payment, they knew or ought to have known that a connected party has or will deliberately fail to deduct and/ or pay sums to HMRC relating to the CIS or PAYE.

A connected party is another party to the construction contract or another party to another construction contract relating to the same construction operations.

If section 62A applies, HMRC may impose a charge of 20% of the amount the person paid under the construction contract. HMRC can also impose penalties in addition.

“Deliberately” could be read in the HMRC v Tooth (UKSC/2019/0136) sense, namely as conduct which is intended to mislead HMRC or where the relevant person is reckless as to the outcome.

When did they take effect?

The measures took effect on 6 April 2026.

Who does the new legislation affect?

Contractors making payments under construction contracts and intermediate contractors/ sub-contractors within multi-tier contracting chains will be caught by the new rules. This includes landowners at the very top of a chain through to sub-contractors at the very bottom. The legislation also extends more widely to arrangements where construction services are provided incidentally to another supply, such as landlord and tenant works under a lease.

HMRC has confirmed in guidance that undertaking due diligence of arrangements by the payor is a defence to the section 62A charge.

What are the practical challenges arising from the new legislation?

Knowledge threshold. Determining when a party “knows” or “ought to have known” there has been deliberate non-compliance is likely to be contentious, as the test involves subjective and objective elements. It would also help to have confirmation that “deliberate” should be read in the Tooth sense.

The rules do not limit the failure to deduct tax to the construction services in question. Instead, they extend to a party’s general compliance with CIS and PAYE not just for a specific project.

HMRC discretion. HMRC may impose the charge on persons to whom section 62A applies. This creates uncertainty as to when HMRC will actually impose such a charge and in what circumstances. The word “may” also raises the possibility of judicial review challenges where HMRC exercises its discretion to impose the charge. This raises the “old chestnut” of whether a judicial review action could be brought before the First-tier Tribunal or must be made before the High Court too.

Risk of wider application. The legislation could be read as having limited application to an arrangement between a contractor and a sub-contractor. However, as the legislation also applies where a connected person has failed to deduct tax, a contractor could be required to consider not only its sub-contractor, but also that sub-contractor’s own sub-contractor and so on all the way down the chain. Similarly, there is nothing in the legislation that limits the provisions to look only downwards in the chain. If you are a sub-contractor, you may need to consider not only the actions of your contractor but also the actions of those contractors further up the chain.

The application of whether a party “ought to know” about another person’s failings is therefore critical. However, without HMRC guidance it is difficult to rule out the possibility that HMRC expects parties to consider compliance risks throughout the supply chain.

Payments to which the provisions apply. Section 62A may capture not only traditional construction contracts but also non-conventional construction contracts such as leases which include the provision of landlord or tenant works for consideration.

Also, section 62A is not just limited to payments for construction services to which CIS deductions apply; it could still apply to contracts where no CIS deductions arise as the payee holds gross payment status or due to exemptions.

In addition, the provisions could also capture payments made by a sub-contractor to its contractor or payments made by a third party to the contract. Each of those parties may, therefore, potentially fall within the scope of the provisions.