A report by the government watchdog cites a catalogue of mistakes in its implementation.
The audit office says the Inland Revenue failed to make it clear to contractors where payments deducted from subcontractors should be sent, failed to provide performance targets and failed to control the availability of vouchers.
The report is the latest twist in the troubled history of the scheme (box, right), which was introduced to eradicate tax evasion, and comes as the Construction Confederation is pressing the Revenue to develop an electronic tax scheme.
Commenting on the main points of the report, Construction Confederation director of taxation Liz Bridge said the NAO was confirming the industry's early criticisms of the scheme as bureaucratic and unworkable.
She said: "These are the things we were shouting about in August 1999. It sounds like the NAO is impartial enough to have given the scheme a roasting." The chief criticism of the CIS scheme is over the control of vouchers, which contractors and subcontractors must complete to record the amount of paid work.
The report says that in the early stages of the scheme, the processing of 30% of vouchers was held up by Inland Revenue investigations, which had been started because they had been given incorrect security numbers. That figure is now 20%.
The report also says the Revenue made a mistake with 2600 cheques worth £3m that led to a delay in cashing them, with consequent loss of interest to the Treasury.
The Inland Revenue is also criticised for failing to cross-check the amounts paid by contractors with the amounts reported to have been deducted on vouchers. The NAO said this failure makes it impossible to measure fraud.
The Construction Confederation has already held early talks with the Inland Revenue on developing an online processing system that would eliminate the need to complete payment vouchers,.
A new scheme would, however, take five years to develop. Bridges said: "The Inland Revenue needs to get a move on. I don't think we could bear more than seven years of this one." The report also noted that since the scheme was introduced in August 1999, 100 000 previously unregistered people had signed on and paid £280m in 1999-00.
The Inland Revenue was unavailable for comment.
The scheme’s troubled historyAugust 1999 Tax scheme launch is delayed after contractors successfully lobby for a three-month moratorium
November 1999 Scheme is launched. Inland Revenue immediately begins a review following complaints that it is too expensive to administer
January 2000 Revenue reduces paperwork for contractors with turnovers of less than £5m
August Revenue refuses to make further reforms despite calls for changes from a government–industry working group
September Government reopens talks with industry to modify scheme
January 2001 Construction Confederation talks to Revenue about replacing paperwork with an online system