HMRC is Cracking Down on VAT in the Construction Industry

HMRC launches tougher action on VAT compliance in construction

In August 2025, HMRC confirmed it is intensifying its focus on VAT compliance within the construction industry. This comes as part of a wider government initiative to close the tax gap and ensure all businesses in the sector are meeting their obligations. For many construction firms, this move will mean increased scrutiny on VAT returns, subcontractor payments, and supply chain transactions.

The construction industry has long been under the spotlight for VAT irregularities, with complex supply chains and multiple subcontractor levels often leading to errors, intentional or otherwise. HMRC’s latest crackdown will see more in-depth audits and real-time reporting requirements, particularly for high-value projects.

Why the construction industry is under increased scrutiny

According to tax specialists, recent legal cases suggest HMRC is now pursuing even compliant businesses for unpaid sums originating elsewhere in their supply chains.
This intensified enforcement is driven by an ongoing battle with fraudsters who exploit staffing agencies to extract significant amounts of VAT from the system.

Reports show that in the first half of 2025 alone, at least six staffing firms appeared on HMRC’s list of deliberate defaulters, collectively responsible for around £51 million in unpaid tax.

Fraudsters typically set up temporary staffing agencies that appear completely legitimate providing workers, managing payroll, pensions and competitive rates. However, at some point in the chain, VAT simply isn’t paid over to HMRC.

Because these agencies are inexpensive to establish and require minimal physical infrastructure, they can process vast amounts of VAT in a short period. By charging VAT on wages, National Insurance and pension contributions, these companies can move large sums quickly before disappearing, leaving HMRC unable to recover the tax from the perpetrators directly. The result? HMRC often turns its attention to genuine construction firms further up the chain, businesses that have no knowledge of the fraud and gain no financial benefit, but who represent a far better target for HMRC to recover lost revenue from.

What this means for your business

• Tighter compliance checks – Expect more frequent HMRC inspections.

• Higher penalties for non-compliance – Mistakes could now cost significantly more.

• Greater emphasis on due diligence – Even when working with reputable suppliers, businesses must document checks and processes in case of investigation.

The frustrating reality is that HMRC does not publish a definitive list of due diligence steps businesses should take, leaving many in a grey area. Without clear guidelines, companies need to proactively review supply chains, verify the legitimacy of staffing agencies and maintain accurate records of all transactions.

Strong Group works closely with construction businesses to ensure compliance and operational efficiency. Our teams can help you implement robust systems for VAT reporting, payroll, and contractor management, reducing the risk of being caught out by fraudulent practices elsewhere in your supply chain. Contact us today on 020 8763 6122 to find out how we can support your business in staying compliant and productive.