Construction firms are being told to urgently tighten subcontractor checks as a major overhaul to Construction Industry Scheme fraud rules takes effect.

The changes that came into force from 6 April mark the biggest shake-up to CIS compliance in two decades and push liability well beyond firms directly involved in wrongdoing.

Under the new regime, HM Revenue & Customs can strip businesses of gross payment status and pursue directors personally for tax losses if they “knew or should have known” fraud was taking place anywhere in their supply chain.

These measures are modelled on VAT countermeasures that have proved effective at disrupting supply chain fraud losses.

The Treasury expects the harder crackdown to raise £205m in its first year, as enforcement shifts towards supply chain accountability.

Jack Sloggett, director at Tax Radar, said: “This is the most significant change to CIS compliance in twenty years. For the first time, HMRC can hold contractors personally responsible for fraud committed elsewhere in their supply chain — even where that contractor had no direct involvement.

“The test HMRC will apply is not whether you actually knew about the fraud. It is whether you should have known.”

Contractors caught out face losing gross payment status for at least five years, full liability for tax evaded and personal penalties of up to 30%.

The warning leaves firms with little room for error as HMRC ramps up pressure on contractors to actively police their supply chains rather than rely on one-off checks.