Since 6 April 2026, an important legislative change to the Construction Industry Scheme (CIS) has clarified how contractors must treat payments made to local authorities and certain public bodies.
This development represents a notable clarification within the CIS framework. Whilst the practical outcome in many cases aligns with previous HMRC treatment, the rules are now established on a statutory basis, removing reliance on extra-statutory practice and providing contractors with greater certainty.
For organisations operating within the construction sector, particularly those engaged in public sector work, it is important to understand both the scope of the change and its practical implications.
Overview of the Legislative Change
From 6 April 2026, payments made by contractors to subcontractors that are local authorities or qualifying public bodies are expressly excluded from the scope of CIS.
As a result:
- No CIS deductions should be made from such payments
- These payments must not be included in CIS monthly returns
- The treatment now has a clear statutory basis, rather than relying on HMRC concessions
The measure forms part of HMRC’s wider policy to simplify CIS administration and ensure that the scheme operates as originally intended.
Background to the April 2026 Reforms
Prior to the 2026 amendments, HMRC operated an Extra Statutory Concession under which certain public bodies were, in effect, treated similarly to subcontractors holding Gross Payment Status. This allowed contractors to make payments without applying CIS deductions.
Whilst functional in practice, that approach relied on administrative concession rather than primary legislation. As a consequence, the position lacked full legal clarity and required contractors to rely on HMRC guidance and interpretation.
The reforms introduced in April 2026 address this by:
- Replacing the concession with a statutory exclusion
- Providing a consistent legal basis for treatment
- Reducing ambiguity in the application of CIS rules
Scope: Which Entities Are Affected
The exclusion applies where the recipient of the payment, acting as a subcontractor, is a qualifying public body. In general terms, this will include:
- Local authorities (including district, borough and county councils)
- Central government departments
- Certain statutory bodies operating within the public sector
It is essential to emphasise that the exemption applies by reference to the status of the payee, rather than the nature or funding of the project.
Fundamental Principle: The Identity of the Payee
A key feature of the revised rules, and one which warrants particular attention, is that CIS treatment is determined by who is being paid, not by the broader context of the engagement.
In practice, this means that the same project may involve payments that fall both within and outside the scope of CIS.
Illustrative Example
Consider a contractor engaged on a publicly funded development:
- Payments received from a local authority as client are outside CIS, as expected
- Payments made to private subcontractors remain fully subject to CIS obligations
- Payments made to a local authority (or qualifying public body) acting within the supply chain are now outside the scope of CIS
Each payment must therefore be assessed on its own merits, having regard to the legal status of the counterparty and the contractual arrangements in place.
Recommended Actions
Given that the revised rules are already in force, contractors should ensure that their current practices are aligned with the legislative position.
Review subcontractor relationships
Identify counterparties that may fall within the definition of a qualifying public body and confirm their status.
Assess payment arrangements
Consider the structure of payments within each engagement and determine whether the exemption is applicable.
Strengthen internal procedures
Ensure systems and controls clearly differentiate between:
- Payments subject to CIS
- Payments excluded from the scheme
Ensure staff awareness
Those responsible for finance, payroll, and compliance functions should be familiar with the revised rules and their practical application.
Maintain supporting documentation
Retain sufficient evidence to support the treatment applied, including contractual documentation and confirmation of the subcontractor’s status.
How The Infinity Group Can Help
The Infinity Group supports construction businesses in managing their CIS obligations and maintaining compliance with HMRC requirements.
We provide a fully managed, end-to-end CIS service, covering all key areas of the process, including subcontractor verification, CIS payroll processing, monthly and nil return submissions, and comprehensive record keeping.
Following the April 2026 changes, it is increasingly important for contractors to ensure that payments involving local authorities and qualifying public bodies are treated correctly under the scheme. With our structured support and oversight, businesses can reduce compliance risks, streamline administrative processes, and focus on their core operations with confidence.