CIS in 2026: nil returns are back, the 'knew or should have known' test is real, and what it means for UK construction contractors

If you run a construction business that pays subcontractors, the Construction Industry Scheme just got stricter. From 6 April 2026, three meaningful changes take effect together: monthly nil returns are mandatory again whenever you pay no subbies in a tax month, the late filing penalty regime is fully reinstated alongside them, and HMRC has new powers to chase contractors who 'knew or should have known' a payment was tied to deliberate non-compliance further down the supply chain. None of this is theoretical. RPC's tax team and Government guidance both confirm the changes are in force, and the first nil-return penalties will land within months.

1. Monthly nil returns — and the late filing penalty regime — are back

From 6 April 2026, every CIS contractor must either file a monthly nil return when they have made no subcontractor payments in the tax month, or notify HMRC in advance that they will not be using subcontractors in that period. This reverses the partial relaxation that has been in place since 2015 and means there is no longer a 'just don't file if you didn't pay anyone' option.

With the nil-return obligation reinstated, HMRC has restored the full late filing penalty regime as set out in CIS 340. Penalties stack quickly: £100 for one day late, an additional £200 at two months, and at six months the larger of £300 or 5% of the deductions you should have reported. For a contractor running ten subbies, missing two consecutive monthly returns can be a four-figure bill before any tax is owed.

2. Public bodies move outside CIS scope

From 6 April 2026, payments made to subcontractors that are local authorities or 'public bodies' (as defined in the new regulations) are out of scope of CIS. If you regularly subcontract elements of a job back to a council direct labour organisation or a public-sector facilities arm, you no longer apply CIS deductions or include those payments on your monthly return.

The administrative simplification is welcome, but the practical risk is the opposite: contractors who carry on applying CIS deductions to public-body payments out of habit are effectively over-deducting and creating a refund problem for their counterparty. Brief your bookkeeper on the new exemption before the first April pay run.

3. The 'knew or should have known' test changes the supply-chain question

This is the change that has Midlands contractors paying attention. Under the new rules, HMRC can take action where a business 'knew or should have known' that a payment, or a CIS deduction claimed against it, was connected to deliberate non-compliance by another party in the supply chain. The penalty exposure is up to 30% of the lost tax in addition to the lost tax itself.

The phrase 'should have known' is doing the heavy lifting. HMRC is borrowing the construction-sector test it has used in VAT fraud cases for years (the so-called Kittel principle) and applying it to CIS. Translation: if a subcontractor's pricing is conspicuously below market, if their UTR comes back as deregistered when you check it, if they insist on cash-in-hand payment, or if their gross-status verification keeps failing, you can no longer wave it through and rely on 'we didn't know'. RPC's analysis of the changes flags exactly these red flags.

4. CIS sits alongside MTD ITSA, not instead of it

A common confusion in the trade press: contractors and subcontractors above the £50,000 qualifying-income threshold also have to comply with Making Tax Digital for Income Tax from 6 April 2026. CIS handles the deductions at source; MTD ITSA handles the quarterly reporting of self-employed income to HMRC. They are separate obligations and you need both — CIS deductions you suffer go on your MTD ITSA quarterly summary as part of your turnover, with the 20% deduction credited against your eventual tax liability.

“The cohort most exposed in 2026 is the small contractor running three or four subbies who has historically filed CIS returns by hand and Self Assessment by accountant once a year. From April, those become two parallel digital filing rhythms — monthly CIS and quarterly MTD.”

5. How working through Kirk Group removes most of the CIS admin

If you supply trade labour rather than running a subcontracting business of your own, contracting through Kirk Group on PAYE means CIS does not apply to your assignments at all. Your tax and National Insurance are deducted at source, you receive a weekly payslip, and there is no CIS verification, no monthly return, no deduction reconciliation, and no exposure to the 'knew or should have known' test. The administrative load that has just doubled for the SME contractor sits with us instead.

For larger main contractors, Kirk Group's vetted-labour pipeline shortens the verification load further: every operative we place has a current UTR, current insurance, current ticket history and current right-to-work documentation on file. You verify the agency once and inherit the underlying audit trail.