HMRC’s new labour supply chain rules: what contractors need to know before April 2026

From April 2026, sweeping new legislation will transform how HMRC enforces compliance in the labour supply arena which impacts on the construction sector. Unpaid CIS is already in HMRC’s reach. Now new rules will extend liability for unpaid PAYE, National Insurance Contributions (NICs), and VAT across the entire labour supply chain – meaning that if one link in your chain fails, you could be left holding the bill.

This is on top of the of the much ignored corporate offences of the failure to prevent the criminal facilitation of tax evasion by a businesses suppliers. An area in which HMRC are increasingly active.

For contractors and end clients in construction, this represents a fundamental shift. The days of assuming that agencies or umbrella companies alone are responsible are over. The responsibility for compliance now rests firmly with everyone in the chain.

What’s Changing?
Historically, HMRC pursued the immediate employer – agencies or intermediaries – when tax went unpaid. Under the new framework:
• Contractors, recruitment agencies, umbrella companies, and even end clients can be held jointly and severally liable for unpaid liabilities.
• There will be no “reasonable care” defence. Even if you thought you had done everything right, HMRC can still demand repayment in full.
• Supply chain due diligence is no longer optional – it’s a legal and financial necessity.

Why This Matters to Construction
The construction sector is already complex, with layered subcontractor relationships, umbrella companies, and outsourced payroll and labour supply services. This makes it one of HMRC’s primary targets.

Take a typical scenario:
• A contractor hires workers through an agency.
• The agency outsources payroll through an umbrella company.
• The umbrella collapses or fails to pay HMRC.

Under the new rules, HMRC can bypass the collapsed entity and pursue the contractor or end client directly for unpaid tax and NICs.

This means that even businesses that acted in good faith could face six-figure bills for liabilities they never expected.

Real-World Example
One mid-sized contractor recently found themselves liable for a £750,000 HMRC demand when their labour provider failed to pay over CIS and VAT. Despite believing they had taken reasonable steps, HMRC ruled that the contractor was ultimately responsible.

This case highlights the risks: if your due diligence and supply chain monitoring aren’t watertight, you could pay the price.

How to Protect Your Business
With less than 7 months until implementation, now is the time to act. Contractors should:

1. Map Your Supply Chain
   Identify every link, from labour supplier, recruitment agencies to umbrella companies. Know who is involved and how they operate.
2. Strengthen Contracts
   Ensure contracts clearly set out responsibilities for CIS, PAYE, NICs, and VAT. Build in protections where possible.
3. Do Robust Due Diligence
   Check registrations, compliance records, and financial health of intermediaries. Document everything.
4. Monitor Ongoing Compliance
   It’s not a one-off exercise. Regular checks and audits are vital.
5. Train Your Teams
   Staff responsible for procurement and finance need to understand the risks and what red flags to look for.
6. Embed these processes in the businesses systems to protect it from the corporate offence of failing to prevent the facilitation of tax evasion by its supplier chains.

Expert Insight
Andy McKenna, tax investigations specialist at DSC Metropolitan, explains:
“We’re already seeing HMRC tighten the net on labour supply compliance in respct of VAT and CIS liabilities. With these new rules, it doesn’t matter where the failure happens – HMRC can and will come after contractors for any unpaid liabilities. The only protection is thorough awareness, due diligence and regular monitoring. It needs to be an essential part of a businesses internal governance and systems to prevent the criminal facilitation of tax evasion by its suppliers.”

The message is clear: April 2026 is closer than you think. Contractors who act now will protect themselves from unexpected and potentially devastating HMRC liabilities.

DSC Metropolitan will be holding a webinar on this topic: “HMRC Compliance in Construction: Protect Your Business Now” on October 22nd at 10 AM BST. In this webinar, attedees will discover how the new HMRC labour supply chain rules will impact construction, and the steps you can take now to protect your business. To attend, register via Zoom: https://us02web.zoom.us/meeting/register/EH8PG-NxSsmk6sOB5Wcigw

Further guidance
For background on the corporate criminal offences regime, see the official guidance here.

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[Image Credit | CHAS]

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