HMRC’s “Should Have Known” Rule could leave construction businesses liable for tax fraud committed elsewhere in their supply chain. From April 2026, businesses must take greater responsibility for spotting warning signs. Here’s what the new rule means and how to protect your business.
HMRC’s “Should Have Known” Rule is a major shift for an industry that relies heavily on subcontractors and layered supply chains. For years, if fraud turned up three subcontractors down the line, that was generally seen as HMRC’s problem to chase, not yours. You can no longer rely on that assumption. It’s worth understanding exactly what has changed before HMRC contacts you.
What Has Changed Under HMRC’s “Should Have Known” Rule?
HMRC calls the new rule the “should have known” test. It sits within the Construction Industry Scheme (CIS). HMRC has borrowed it from VAT law, where it’s known as the Kittel test, and by HMRC’s own account it’s worked well there at disrupting fraud. So they’re bringing the same logic to construction. Read more about HMRC’s “Should Have Known” rule and its practical impact on construction businesses.
Previously, HMRC generally had to prove you knew about the fraud, or were somehow involved, before it could come after you. Now it only has to show that a reasonable business in your position ought to have picked up on the warning signs and done something about them. That’s a much lower bar for HMRC to clear.
Annoyingly, there’s no checklist. HMRC hasn’t set out a fixed list of what “sufficient” due diligence looks like, and it seems that’s on purpose. What we do know is that a folder full of tidy paperwork won’t automatically protect you. If the paperwork looks fine on the surface but obvious red flags were sitting there unaddressed, that folder isn’t going to help much when HMRC comes knocking.
Under HMRC’s “Should Have Known” Rule, the penalties are significant. HMRC can strip a business of Gross Payment Status, assess it for tax somebody else owed, and add a penalty of up to 30% of the lost tax on top. In some cases that liability reaches directors personally, not just the company.
Warning Signs Under HMRC’S “Should Have Known” Rule
Nobody’s expecting you to turn into a fraud investigator. But HMRC is expecting you to notice the things that are, frankly, fairly obvious once you’re looking for them. A subcontractor who claims plenty of experience but can’t point to any real past work is one. Being asked to pay into an offshore account is another. So is a subcontractor’s income suddenly jumping for no reason you can point to. Rates that seem too cheap to actually cover the labour involved, or invoices that don’t quite line up with the work done, tend to fall into the same bucket.
On their own, none of these prove anything. But if two or three show up together and nobody does anything about it, that’s exactly the sort of pattern HMRC will point to later.
HMRC’s “Should Have Known” Rule in Practice
Look at how similar VAT cases have played out. The VAT system has used this test for years. In one case from 2025, a business successfully overturned a multi-million pound assessment because, when concerns first came up, it had actually done something about them and could show a clear trail of what it checked and when. In a different case that same year, a company lost its appeal and was hit with a 30% penalty because the director had spotted unusually low pricing and simply carried on regardless, with no real checks in place at all.
The pattern is pretty consistent. It’s less about treating everyone you work with as a suspect, and more about being able to show, with actual dates and records, that when something looked off, you noticed and did something.
How to Comply with HMRC’s “Should Have Known” Rule
Treat due diligence as something ongoing rather than a form you fill in once when a subcontractor first joins you. Check gross payment status and company details before work starts, then check again from time to time, not just at the very beginning.
Write things down. If a payment felt slightly off and you asked a question, or held off paying until you got an answer, note it somewhere. That note is your evidence if HMRC ever asks.
Go back over your subcontractor list every few months with fresh eyes, particularly anyone whose invoicing pattern has shifted recently. A subcontractor whose turnover jumps sharply, or who suddenly wants payments going through a different account, is worth a proper conversation before you carry on as usual.
And bring your accountant in early. Getting a second pair of eyes on your supply chain now costs a lot less than sorting out an investigation after the fact.
Talk to us before HMRC does
We help construction businesses prepare for HMRC’s “Should Have Known” Rule by strengthening their due diligence and CIS compliance processes. If you’d like us to have a look at your current due diligence process and check it holds up under this new test, book a free call with Magnum Accountancy. It’s a fairly straightforward conversation, and a much easier one than the alternative with HMRC.
