Updated Construction Industry Scheme guidance ‘needs urgent clarification’

HMRC said that the updated CIS guidance, published on 5 May provides further clarity over when contracts fall within the CIS, a special tax and compliance regime applicable to construction contractors and subcontractors. Under the new guidance, a business can enter into a contract falling within the CIS, and so become a ‘contractor’ for the purposes of the scheme, where the contract “funds construction operations”.

However, property tax expert Andrew McCarthy of Pinsent Masons, warned that without further clarification, the revised guidance could signal “enormous and unexpected” new burdens for the industry.

“More detailed guidance from HMRC is urgently needed on what they mean when they say a party ‘funds construction operations’ – are they looking to clarify that the CIS applies to forward-funding agreements, which has always been the case, or are they looking to extend it to lending arrangements?” he said.

“The latter would be an enormous and unexpected change that would throw significant administrative burdens in the way of lending for construction and seemingly run counter to the UK government’s stated objective of increasing the pace of development.”

The CIS rules require ‘contractor’ businesses to deduct tax at a rate of 20% or 30% on payments to subcontractors under ‘construction contracts’. Subcontractors may, however, be entitled to receive payments gross if they have registered with HMRC and satisfied various compliance requirements. The term ‘contractor’ is widely defined for CIS purposes and can include a wide range of businesses beyond those undertaking traditional construction activities. However, it has previously been accepted practice that the CIS does not apply to lending agreements.

“A business that fails to apply the CIS rules correctly can be liable to pay interest and penalties – therefore, businesses must have clarity on whether their lending arrangements could fall within the rules,” McCarthy said.

Where the rules apply, a contractor must meet several compliance obligations, including: registering as a contractor with HMRC; verifying the CIS payment status of its subcontractors; deducting tax, if required, from payments made to subcontractors; paying any tax withheld and submitting CIS returns to HMRC; and maintaining tax records.

New measures to combat fraud across the construction sector were introduced from April 2026 that require businesses to take steps to prevent CIS fraud by their subcontractors. A business is at risk of significant penalties if it knew, or should have known, that it entered into a transaction connected with CIS fraud. Businesses will also need to have processes in place to complete monthly CIS returns, including nil returns where no CIS payments have been made during the course of a month.

McCarthy said: “The new anti-fraud measures are clear that a ‘contractor’ can be liable for unpaid tax and penalties arising from fraud of a ‘subcontractor’. If lending transactions are indeed considered by HMRC to be within the scope of CIS, the due diligence required by lenders in respect of their borrowers – and the borrower’s subcontractors – will be significantly expanded adding yet more cost and complexity.”