Potential implications for businesses

Details enforcement action and financial impacts to businesses.

HMRC assesses tax that has been diverted through non-compliance and raises determinations of liability, undertaking compliance activity to recover tax and National Insurance contributions lost.

Interest and penalties may also be charged which can significantly increase the financial implications for businesses.

These enforcement actions are taken against businesses who are liable for payment of the tax and penalties, as deemed by legislation and caselaw. This can be the defaulter or associated businesses in the supply chain.

In addition to the liability itself, the methods that HMRC can take to recover tax losses, such as compulsory freezing orders and winding up orders can result in disruption to chains and commercial operations.

Joint and several liability for PAYE tax losses relating to non-compliant umbrella companies

Chapter 11, Part 2 ITEPA 2003 is legislation that applies from 6 April 2026.

It means that an agency or end client (if there is no agency involved in the supply chain) has joint and several liability for making sure PAYE is operated correctly, when an umbrella company is used to engage workers in a labour supply chain.

If HMRC finds that an umbrella company has not operated PAYE correctly, it can recover any underpayment directly from the agency or end client (if there is no agency involved in the supply chain).

The rules apply to:

• payments made on or after 6 April 2026
• the agency that has the contract with the end client to supply workers
• the end client, if:
  • there’s no agency involved
  • the agency is connected with the umbrella company, or
  • the agency is overseas There may be some circumstances when the new rules will apply in these cases, if a worker is supplied by a business that is a ‘purported umbrella company’. This includes when it is reasonable to suppose that one or more parties in the contractual chain would assume the purported umbrella company employed the worker, or was treating payments as earnings, when it did not.

Tax determinations, penalties and Gross Payment Status removal, connected to Construction Industry Scheme (CIS) fraud

Changes to the Finance Act 2004 (FA 04) apply from 6 April 2026, in relation to the Construction Industry Scheme (CIS)

They apply when a business:

• makes a payment for construction operations or
• makes a return containing a CIS credit and it knew, or should have known, this was connected to deliberate non-compliance by another party (or the business itself if it makes a credit claim where no deduction was made).

HMRC can:

• immediately remove Gross Payment Status (GPS)
• make a determination on the business relating to the tax lost (20% of the payment made or an amount equal to the credit claimed)
• charge a penalty of up to 30% of the value of the tax loss, which can apply to the business and its directors or other persons connected to the business In addition, where GPS is removed immediately, the business will be prevented from reapplying for GPS for a period of 5 years.

S62A, FA 04 applies if a person makes a payment when they knew or should have known that a connected party had been, or would be, deliberately non-compliant with their CIS or PAYE obligations.

A connected party can be:

• another party to the contract to which the payment relates — for example, a supplier in the same contractual supply chain

• a party to another construction contract relating to the same construction operations — for example, a supplier in a different supply chain working on the same construction project
  S62B, FA 04 applies when a return is made containing CIS credit and the person making the return knew, or should have known that:

• the CIS credit had not been deducted

• the deduction had been, or would be, deliberately not paid (by the contractor)
  The other grounds for immediate GPS cancellation are where a business has:

• provided false information at registration for GPS

• fraudulently made an incorrect return or provided incorrect information

• knowingly failed to comply with a CIS obligation

Denial of VAT input tax relating to transactions associated with fraud, under the Kittel principle

This can apply to:

• self-billing arrangements — where there is fraudulent or negligent behaviour by the supplier
• organised labour fraud and other VAT supply chain fraud — can apply at multiple points in the chain as all businesses are connected through their transactions The Kittel principle arose from a European court judgement in the case Axel Kittel Vs Belgium State in 2006 and still applies in the UK.

The Kittel principle can be broken down into 3 questions:

1. Was there a fraudulent evasion of VAT?
2. Was the transaction ‘connected with’ the fraudulent evasion of VAT?
3. Did the taxable person, when he entered into the transaction, know or should have known that it was ‘connected with’ fraudulent evasion of VAT? The European Court of Justice found that a person who knew or should have known that their transaction was connected to fraud ‘aids the perpetrators of the fraud and becomes their accomplice’ and should therefore lose their right to deduct input VAT.

An entity cannot put itself outside the Kittel test by deliberately not asking questions.

As well as the denial of input tax, a schedule 69C penalty can be applied to an officer of the company, the penalty is up to 30% of the VAT denied.

Criminal charges and unlimited fine under the corporate criminal offence (CCO)

This can apply to:

• internal fraud

• fraud carried out within a supply chain
  The Criminal Finances Act 2017 contains 2 offences relating to the facilitation of tax evasion. They are:

• tax evasion by a person — including employee, contractors and sub-contractors

• facilitation of tax evasion by a person — including employees, contractors and sub-contractors
  The legislation means that if an ‘associated person’ of a business (relevant body) criminally facilitates tax evasion and the business is unable to demonstrate that it had reasonable procedures in place to prevent such facilitation, the business is guilty of a criminal offence.

In brief:

• the relevant body (corporate body or partnership) does not have to have been aware that criminal facilitation took place, nor must it have benefitted financially or otherwise from the deliberate and dishonest behaviour
• an associated person does not have to be a direct employee of a relevant body, it can be anyone acting on their behalf — including contractors and sub-contractors
• an organisation cannot sub-contract its way out of its CCO liability or try to deem someone a non-associated person A relevant body should be using reasonable prevention procedures to prevent fraud and the facilitation of fraud, by its associated companies or individuals in its supply chains.

Offences can result in unlimited financial penalties and a public record of conviction.

Assessments of liability relating to underpayments that can attract interest and penalties.

Assessments can apply to:

• off-payroll working (IR35) — potentially as an end-user where the rules have not been applied correctly or as an agency identified as the ‘deemed employer’
• self-billing arrangements — where VAT invoices are deemed invalid, for example where a business does not follow the guidance and continues to trade with a supplier who is no longer VAT registered — if connected to VAT fraud, the denial of input tax can be considered under the Kittel principle
• Construction Industry Scheme — where deductions have not been correctly made and remitted to HMRC, for example, where a contractor continues to make gross payments after a sub-contractor has lost their gross payment status

• tax avoidance — involved parties must repay tax avoided
  If Income Tax and National Insurance contributions have not been deducted and paid to HMRC correctly, the following legislation determines the basis of assessment of liability and where HMRC may look to recover the tax losses in the chain:

• agency legislation

• managed service company legislation

• employment status legislation, including Chapter 11 ITEPA 2003

Criminal charges and fines under the failure to prevent fraud offence

The Economic Crime and Corporate Transparency Act 2003 (ECCTA), contains the offence of failure to prevent fraud, which applies to large organisations across the UK.

It covers a number of specific fraud offences, as well as the aiding, abetting, counselling, arranging and encouragement of any of these offences. They include:

• fraud by false representation
• fraud by abuse of position
• participation in a fraudulent business
• cheating the public revenue
• false accounting
• fraudulent trading The full list of offences that apply in England and Wales, Northern Ireland and Scotland are listed in Schedule 13 of ECCTA 2003.

The legislation applies where an ‘associated person’ of a business (relevant body) commits a fraud offence that was intended to benefit the business or its clients. If the business is unable to demonstrate that it had reasonable fraud prevention procedures in place, or that it was not reasonably expected to have these in place, then it may be held criminally liable for the offence.

In brief:

• associated persons can include employees, partnership partners, agents, subsidiary undertakings, contractors, sub-contractors and franchisees

• the offence applies to:

  • large incorporated bodies and partnerships
  • large partnerships which are not incorporated
  • large incorporated bodies and partnerships formed outside of the UK with a ‘UK nexus’ — a UK nexus exists where an act that was part of the fraud took place in the UK, or the gain or loss occurred in the UK

Published defaulters list

HMRC publishes details of deliberate tax defaulters. These are people who have received penalties, either for deliberate errors in their tax returns or those who have deliberately failed to comply with their tax obligations.

Published avoidance schemes and promoters list

HMRC publishes details relating to named avoidance schemes and associated promoters.

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