Third-party labour fraud in UK construction industry: how can businesses protect themselves?

The Upper Tribunal's decision in Opus Labour Services Limited (in liquidation) and Jason Giller v HMRC [2026], handed down earlier this year, is an important reminder of the tax and legal risks facing construction businesses that rely on outsourced labour and other third-party providers. VAT fraud in construction labour supply chains is an area of particular focus for HMRC, and the consequences for businesses caught up in it, even without actual knowledge, can be severe. 

Background

Opus Labour Services Limited operated as a recruitment company providing labour to customers in the construction industry, using a number of third-party companies to engage and pay the construction workers. The so-called "payroll companies" were Construction Industry Scheme (CIS) subcontractors, registered with HMRC for CIS gross payment status and went into liquidation in 2024 leaving tax and VAT unpaid. 

HMRC alleged that the payroll companies were defaulting suppliers that had fraudulently failed to account for VAT. It therefore denied Opus input tax credits on the basis of the Kittel principle, under which the right to deduct input tax is lost where a taxable person "knew or should have known" that their transaction was connected with the fraudulent evasion of VAT. HMRC also imposed related penalties on the company together with personal liability notices against its sole director.

The First-tier Tribunal (FTT) accepted that the director had neither actual nor "blind-eye" knowledge of the fraud. However, it found that he did have constructive knowledge, meaning that he should have known, and therefore dismissed the appeal. Among the factors supporting that conclusion, the FTT noted that the director had dealt with five consecutive fraudulent suppliers over 12 months. It described that pattern as "entirely beyond the realm of what could be characterised as misfortune" and the due diligence as "woeful".

The Upper Tribunal upheld the FTT's decision in full, rejecting all three grounds of appeal. It confirmed that the FTT had correctly directed itself on the law and was entitled to find constructive knowledge on the basis of the factors identified. 

The broader Kittel risk

Opus is by no means an isolated case. The recent decision in Harlequin Brickwork Limited & Ors v HMRC [2026] provides a further illustration of the Kittel standard in the construction sector, where the FTT stated that it "cannot accept that the Appellants had no knowledge of the prevalence of VAT fraud in the construction industry". Harry Construction Ltd v HMRC [2025] similarly confirmed that failing to use available checks can itself support denial of input tax. 

The practical message for large contractors is stark: if VAT fraud occurs in your supply chain and you "should have known" about it, you will lose all the input tax you paid on the relevant transactions. This applies even if the work was genuinely performed, you had no dishonest intent and the fraud was perpetrated by a third party. In an industry where labour is commonly supplied through chains of intermediaries rather than direct employment, the potential exposure is systemic.

Personal liability for directors

The Opus decision also highlights the potential personal liability for directors. HMRC can impose a penalty for transactions connected with VAT fraud where the taxpayer business knew or should have known. HMRC can then issue personal liability notices against company directors and officers, making them personally liable for some or all of that penalty where the company's conduct giving rise to the penalty is attributable to that individual. In Opus, such personal liability notices were imposed on the director for 100% of certain penalties. This means that even where a company enters insolvency, as Opus did, the financial exposure can follow the director personally.

Failure to prevent offences

The potential risks do not end with tax liabilities. Under the Criminal Finances Act 2017 (CFA), businesses commit a criminal offence if they fail to prevent an associated person (an employee, agent or third party who is performing services for or on behalf of the business) from facilitating tax evasion by a third party. These are strict liability offences and so it is not necessary to prove knowledge on the part of senior management. If a business has facilitated tax evasion, the only defence to the CFA offences is having reasonable preventative procedure in place.

If prosecuted, a business can face unlimited fines, reputational damage and potential loss of regulatory approvals (and being barred from public bids, as discussed below). Last year, a UK accountancy firm became the first business charged under the CFA offences.

For large organisations, the failure to prevent fraud offence under the Economic Crime and Corporate Transparency Act 2023, which came into force on 1 September 2025, adds a further layer of exposure. This covers various types of fraud including tax fraud. 

Procurement Act 2023

For construction companies that bid for or hold public sector contracts, the risks above carry a further and potentially devastating consequence: exclusion from public procurement.

Under the Procurement Act 2023 (PA 2023), which came into force on 24 February 2025, contracting authorities must treat suppliers as "excluded" or "excludable" where mandatory or discretionary exclusion grounds apply. 

The exclusions in relation to tax were significantly expanded under the PA 2023 and now include mandatory exclusions for, among others, various tax fraud offences, the CFA offences (discussed above) and certain tax penalties. Notably, there is an exclusion for the specific type of tax penalties issued in the Opus case and it applies to penalties imposed on a supplier and "connected persons". This is broadly defined to include, for example, parents, subsidiaries, directors, and any person who exercises significant control over the supplier. Critically, suppliers are also at risk if relevant tax penalties have been issued to a supplier's "associated person" (defined as any person that the supplier is relying on in order to satisfy the conditions of participation, other than a guarantor) or a subcontractor (even if not an associated person).

Fair Work Agency and employment status consultation

Tax, National Insurance and VAT are not the only risks. Employment status and new rights introduced under the Employment Rights Act 2025 also impact cost and liability in construction labour supply chains. From next spring, the newly established Fair Work Agency will take over responsibility for enforcement of the National Minimum Wage, holiday pay and other employment rights. It has confirmed that construction is one of the three sectors it regards as high risk due to the long and complex supply chains involved. It is likely to focus its invest investigatory efforts in understanding the higher risk sectors.

The government has also launched an employment status consultation seeking to close "loopholes" that allow "bogus self-employment". Proposals include introducing a presumption of "worker" status for each individual unless the "employer" can prove that they are not.  In a construction labour supply chain, this presumption could apply to whoever "controls" how the individual works. 

If taken forward, these changes will make it much harder to defend self-employed engagements: this is likely to have a material impact on a sector that relies heavily on self-employed labour and the related cost savings in employer National Insurance. Engaging a worker as a CIS subcontractor or via a CIS labour supplier does not guarantee that they are self-employed. In certain cases, liability for employment rights can attach to different parties in the supply chain. Employment status claims typically involve multiple parties, including the "end user", the labour supplier and the CIS payment company, and can be costly. 

Osborne Clarke comment

Construction businesses operate in one of the highest-risk environments for VAT and other types of tax fraud. They should take immediate steps to review their supply chain arrangements and compliance procedures. These steps may include, for example, independent verification of VAT registration against HMRC's online database before payments are made. Suppliers should be asked to provide evidence of real-time information filings. Gross payment status under the CIS is not a substitute for proper due diligence. Where a supplier invoices with VAT for labour services but there is reason to think workers are being paid under CIS rather than PAYE, this should be investigated without delay and all checks should be fully documented. 

For CFA purposes, businesses should ensure that they have documented reasonable prevention procedures in place, kept under regular review in line with HMRC's guiding principle of monitoring and review. For large organisations, the same exercise should now extend to the failure to prevent fraud offence. Separately, businesses that bid for public contracts should review their exclusion grounds. This includes checking whether connected persons, such as directors who may have received penalties in a personal capacity, have been subject to events that trigger mandatory or discretionary exclusion. Where a potential mandatory exclusion ground is identified, specialist advice should be sought promptly.

For employment rights purposes, businesses should ensure that they know which parties in the supply chain engage and pay supplied construction labour and on what basis. They should require labour suppliers to confirm that any individual engaged under CIS meets the tests of being self-employed.