HMRC is targeting construction companies over technical CIS reporting errors, backed by a £1.7 billion government investment in new technology and extra compliance staff. 

Discrepancies in monthly reporting are triggering widespread tax inspections. HMRC is using technology to cross-reference payments flowing through the construction supply chain. Innocent mistakes are costing firms tens of thousands of pounds in underpayments and penalties.

No company is immune: from £1 million social housing contractors to £500 million tier-one main contractors, the crackdown spans the entire industry. 

Dan Davies, compliance director at Hudson Contract, said: “I've never seen so many tax inspections across the sector. The vast majority of companies are not trying to avoid paying tax – they’re applying the CIS scheme to the best of their understanding, while also dealing with the day-to-day challenges of running their businesses. However, HMRC is using new technology and a more aggressive approach to dive into the technicalities of CIS, which is catching people out when they come under review.”

Hudson has been conducting proactive mock CIS inspections for years, ensuring compliance for clients.

HMRC is focusing on three categories of errors:

• First, complete non-reporting of subcontractors who fall within scope of CIS, with labour agencies being the most common culprits. In one case, a construction firm had failed to report 79 CIS-eligible subbies.
• Second, incorrect payment splits between labour and materials/plant. It is a common misconception that CIS tax is only deducted from labour costs. Contractors are now more than ever being held responsible for not deducting enough tax as a result of paying subcontractors too much for materials and plant, and not meeting HMRC's strict requirements. If they deduct tax incorrectly, they become liable for the underpayment. 
• Third, reporting errors where correct deductions are being made but entered in wrong columns on CIS returns, a process which has been followed by some companies for years. However HMRC systems now appear to flag these mismatches, triggering reviews.

The financial impact can be severe. At a time where cashflow is critical to construction companies, firms could be expected to make good underpayments of tax, stretching back up to four years. HMRC classifies these errors as "careless mistakes” – even when companies believed they were compliant – which carries the threat of penalties ranging between 15-30 per cent of the total underpayment.

Mr Davies said the inspection process has become more rigorous, impersonal and drawn out. Inspectors regularly gather evidence and send it to senior officers in central hubs for decisions. Many inspections are conducted entirely by email with no face-to-face contact, making compliance with written guidance and regulation even more important. 
Inspectors check company accounts, websites, and LinkedIn profiles to identify specific areas of concern. One firm faced questions over large travel and subsistence expenses that didn't match their local operating radius.

Mr Davies added: “Hudson offers mock CIS inspections to give companies peace of mind that they're absolutely compliant. We proactively check monthly reporting and identify common mistakes before HMRC does. Our experience handling inspections means we know exactly what HMRC looks for and the areas that raise red flags.

“We check monthly reporting, ask questions around supply chains, and help clients put watertight processes in place. Our team can identify and fix these issues before they trigger an HMRC inspection.”

The £1.7bn investment is part of HMRC's wider digital transformation, which aims to use AI and automated systems to identify compliance risks and reduce the tax gap. The funding will also recruit an additional 5,500 compliance staff. 

It comes as the government clamps down on CIS fraud in supply chains with new powers for HMRC from April.

For more information on help with HMRC representation, speak to our team today.