Construction businesses are being warned to prepare for increased scrutiny from HM Revenue and Customs (HMRC) as new tax avoidance rules and changes to the Construction Industry Scheme (CIS) are expected to put the sector firmly in the spotlight. Recent figures from HMRC show the tax authority is relying more heavily on artificial intelligence (AI) and advanced data analytics to identify non-compliance, with experts expecting investigations to increase further as more compliance officers are recruited.
HMRC's AI-Driven Tax Recovery
HMRC used AI and advanced data analytics to help protect and recover £10 billion in tax revenue during 2025-26, according to the department's latest annual report and accounts. Overall, HMRC achieved a record compliance yield of £50.2 billion, although it narrowly missed its £50.4 billion annual target. The report also confirmed HMRC is ahead of schedule in recruiting an additional 5,500 frontline compliance officers by 2030 as part of wider efforts to reduce the UK's tax gap.
Penny Simmons, who specialises in tax risk management at Pinsent Masons, said changing risk patterns within HMRC's large business directorate point to growing attention on the construction industry. "It is particularly interesting to note the shift in focus in the sectors being targeted within the large business unit over the last year. The tax under consideration, which guides HMRC's focus of attention in terms of future investigations, highlights a doubling of tax risks in the automotive and construction sectors since last year, and Construction Industry Scheme (CIS) tax risk has been identified as a specific risk this year," she said.
Impact of New Tax Rules on Construction
Simmons added that recent legislative changes, notably new rules combatting tax avoidance by umbrella companies and changes to the CIS rules, "may disproportionately impact the construction sector, which is heavily reliant on temporary labour and where there is widespread use of umbrella companies." She advised: "Construction businesses should expect greater scrutiny by HMRC and should strengthen oversight of their labour supply chains and ensure appropriate contractual protections are in place."
Ian Robotham, tax law expert at Pinsent Masons, said: "The figures demonstrate the increasingly important role of technology in HMRC's enforcement activity. AI and other data analytics are now making a major contribution to HMRC's tax investigation work." Robotham noted that HMRC's long-established Connect data analytics platform had given the department a significant advantage. "HMRC's Connect system has built up a trove of valuable data and it is now able to deploy AI more to produce a target list of businesses and individuals to investigate," he said.
Compliance Yield Growth Slows
Although HMRC recorded its highest ever compliance yield, the pace of growth has slowed. The £50.2 billion achieved represents a 4.6% increase on the previous year, compared with growth of 15% a year earlier and 23% the year before that. The report also shows HMRC collected £966.4 billion in total tax revenues during the last tax year, up £90.4 billion.
Large businesses continue to generate the biggest compliance returns. Corporation tax investigations involving large companies brought in £6.45 billion, while VAT investigations into large businesses generated £4.59 billion, making them HMRC's two most productive compliance categories. The department said it is also more likely to recover underpaid tax from large companies once it has been identified.
Outstanding Tax Debt Rises
Meanwhile, outstanding tax debt increased from £44 billion to £44.7 billion over the year. HMRC said it resolved almost £102 billion of debt during the period and expects debt as a proportion of tax receipts to fall over the current spending review period, with debt collection remaining an increasingly important focus as it seeks to boost revenues.
