The “knew or should have known” standard is the knowledge test introduced by Finance Act 2026 (Royal Assent 18 March 2026, in force 6 April 2026) that determines when HMRC can revoke a contractor's Gross Payment Status or impose a knowledge-based penalty under FA 2004 ss.62A or 62B.
Before April 2026, HMRC had to demonstrate that a contractor actually knew about fraud or deliberate non-compliance in its supply chain before penalising it. Finance Act 2026 lowered the bar: a contractor who did not know but should have known (because a reasonably diligent contractor carrying out proper checks would have identified the risk) is now equally exposed. The distinction matters enormously in practice:
- “Knew”: the contractor had direct knowledge that a connected party was deliberately failing to comply with CIS. HMRC must evidence this.
- “Should have known”: the contractor failed to carry out reasonable due diligence (re-verification, Companies House check, bank name verification) before making a payment. That failure is itself enough for HMRC to act, with no need to prove intent or direct knowledge.
The practical consequence is that the absence of a due-diligence record is a liability risk. A contractor who pays a subcontractor without verifying their CIS status, checking their Companies House entry or confirming the bank account name cannot argue “I did not know there was a problem”: they should have known because they failed to look.
If HMRC determines the standard is met, the consequences include immediate GPS revocation with no advance notice, a five-year reapplication ban, and a penalty of 20% of the relevant payment (FA 2004 s.62A) or 20% of the sums treated as paid on a return (FA 2004 s.62B). For a contractor paying £200,000 a year in labour, the s.62A penalty exposure alone is up to £40,000.
The due-diligence checklist that satisfies the standard is explained at CIS supply chain compliance and due diligence. The broader April 2026 rule changes are at CIS April 2026 rule changes explained.