Chancellor Gordon Brown announced in his pre-Budget report last Wednesday that the Construction Industry Scheme, which has been widely criticised by the construction industry itself, would be overhauled.
Under the new system, which will come into effect by 2005, contractors will have to verify their workers' employment and tax status on a new Inland Revenue website.
Contractors will be required to test the employment status of their workers on the online system before they employ them.
In another move to reduce firms' paperwork, the Revenue is to discontinue its voucher system in favour of periodic returns. Previously, contractors had to give them to subcontractors when making payments.
Liz Bridge, taxation director at the Construction Confederation, said the success of the scheme would depend on how much the government spent on its computer system.
She said: "It is not unreasonable for all contractors to have access to the internet by 2005 when the measures are to come into effect."
Dispensing with the card system could cut industry costs by up to 70%
Nick Antoniou, an accountant with of Smith Williamson, said the government had recognised that the CIS had run into practical difficulties.
He said the new measures emerged from a recently published regulatory impact assessment that looked at a range of proposed improvements to the CIS. It suggested that dispensing with the tax card system could cut industry costs by up to 70%.
Antoniou added that there would inevitably be costs involved in the introduction of the new system, particularly in the first year of its implementation.
He said: "The government also recognises that if the reform proposals are not implemented properly, there is a risk that different problems will arise."
The CIS was introduced in the late 1990s to prevent tax evasion by subcontractors. The scheme worked by deducting tax at source from payments to subcontractors engaged in construction in the UK.