New Lease Accounting Rules (from 2026)
What is the Construction Industry Scheme?
The UK Construction Industry Scheme (CIS) is a tax system operated by HMRC for the construction sector, where contractors deduct tax from payments made to subcontractors and send those deductions to HMRC as advance payments toward the subcontractor’s tax and National Insurance.
CIS applies to most construction work such as building, repairs, decorating, plumbing, and demolition, with typical deduction rates of 20% for registered subcontractors and 30% for unregistered ones, while some qualifying subcontractors can receive full payments through gross payment status. Contractors are responsible for registering for CIS, verifying subcontractors, filing monthly returns, and keeping payment records.
What Has Changed?
As outlined in the Autumn Budget 2025, several changes took place on 6 April 2026 that may affect those who use the Construction Industry Scheme; the proposed changes strengthened HMRC’s power to tackle non-compliance and fraud.
- Mandatory Nil Returns: CIS contractors are now required to submit a monthly CIS return even if no subcontractors have been paid. As an alternative, contractors can inform HMRC in advance that they will not pay subcontractors that month by submitting an inactivity request. Failure to do so will result in penalties.
- Stricter Penalties: A full CIS late filing penalty regime has been reinstated. A £100 fixed penalty applies for any late return, followed by a £200 penalty after two months and a tax-geared penalty at six months of a minimum of £300 or 5% of any liability which should have been shown on the return, with a further penalty at 12 months, which may increase significantly depending on behaviour (including deliberate non-compliance).
- Stricter Compliance: HMRC has brought CIS in line with VAT rules ‘knew or should have known’ to prevent fraudulent evasion of tax. If HMRC believes a business knew or reasonably should have known they were connected to fraudulent behaviour, HMRC can take the following actions:
- Gross payment can be revoked immediately, and the business can’t apply for five years (previously they could apply within one year).
- The contractor may be held liable for unpaid tax if HMRC determines the business knew or should have known about fraud even if the invoice has been paid in full – settling with your subcontractor doesn't protect you if HMRC determines you knew or should have known the arrangement was connected to fraud. A 30% penalty can be charged on top of the lost tax, and this can be applied personally to directors, not just the business itself.
- Public Body Exemption: Payments made to local authorities and specific public bodies are now exempt from CIS deductions. Contractors dealing with these entities must update their internal systems and exclude these payments from standard CIS calculations.
With the April 2026 CIS changes now in effect, construction businesses need to act quickly to ensure they are compliant. Our accountants would recommend businesses implement compliant solutions, updating software if necessary, changing processes and ensuring frameworks are up to date. If you do require support by experts, please contact us today!
