HMRC raised £15 billion in six months. Your firm could be next

The taxman is stepping up the targeting of construction firms over the employment status of their CIS subcontractors and consultants. Firms are also being caught out for minor technical breaches of CIS rules around paying net-paid subcontractors for plant and materials.

Hudson Contract is the largest payer of self-employed tradespeople in the industry and closely monitors trends impacting the supply chain and the issues facing clients and potential clients. It is currently seeing an increase in compliance checks on small and medium-sized construction firms.

In the first half of 2025-26, HMRC secured more than £15 billion through compliance activities across all sectors with construction being one of the key targets. The government has invested in new technology and extra compliance staff to extract further funds from businesses for the Exchequer.

In one recent example, a well-run and successful company found itself exposed to massive liabilities resulting from poorly-drafted contracts used to engage self-employed CIS subcontractors and consultants. The firm in question believed the subcontractors it had used were genuinely self-employed and its contracts, drafted by a paid third party, would confirm this. However, HMRC had other ideas and issued a determination reclassifying the subcontractors as employees for tax and national insurance purposes.

In a number of other cases, Hudson has seen contractors fall foul of the technical rules that catch lots of firms out every year, but until recently were treated with leniency by HMRC.

Contractors already find it confusing to determine who should be verified and reported under CIS. But the rules around what is allowable as a gross payment for plant and materials when charged by net-paid subcontractors are even harder to navigate. Scary when you consider it is the contractor that will be held to account by HMRC for any under-payment, not the subcontractor who receives the payment and often provides the figures. And that’s alongside the fine line between when subcontractors become labour providers and as such should be treated differently for VAT.

Dan Davies, compliance director at Hudson Contract, said: “When so many contractors contact us for help having got the technicalities wrong, it makes you think something has to be wrong with either the rules or the guidance. I used to find that if you corrected the mistakes and reassured HMRC that you would not repeat them, it would not issue penalties or revoke gross payment status, but that stance has changed.

“When it comes to the recent status case I helped with, it is frustrating because had this company been a Hudson client, the outcome would have been entirely different and the client would not be staring down the barrel of a six-figure fine. Ultimately the subbies acted and were treated like subcontractors rather than employees, but the determining factors were not expressed in the written contracts. In fact, the opposite was true. 

“This case serves as a warning that poorly-drafted contracts are as bad as no contracts at all. If you have questions about your supply chain arrangements or your contracts, or find yourself on the receiving end of an HMRC compliance check, get in touch as a matter of urgency.”