The Inland Revenue is determined to launch a new tax regime next April, even though there’s an excellent chance that nobody will be able to comply with it. Sarah Richardson reports from the surreal world of Whitehall.

The construction industry has never seriously considered holding a party to celebrate the fine work of the Inland Revenue. On the other hand, its gripes have largely been confined to occasional mutterings. The industry has longstanding complaints about the complicated paperwork required to comply with the Revenue’s systems, the continual confusion over the status of self-employed workers and the way the regulatory burden disadvantages legitimate companies compared with those firms that operate in the tax-free grey market.

But now the Revenue has sparked real outrage. “I can see Tony Blair standing up in parliament to apologise for this,” says Dennis Keeling, a construction IT expert. “It’s going to be a fiasco.”

The fiasco Keeling fears is the introduction of the revamped Construction Industry Scheme in April next year. The CIS has been the main taxation regime covering self-employed workers since 1999. The Revenue intends to haul the CIS into the 21st-century, and close loopholes in the test of whether a worker is genuinely self-employed. To do this, the Revenue and Customs have designed a complex online system.

Why the industry is up in arms

The industry generally accepts that this move is necessary. What it objects to is the Revenue’s decision to launch the scheme in April. Or rather, the decision to launch it in April regardless of the howls of protest from those affected by it.

On the face of it, the difficulties are insurmountable: for one thing, the software needed to operate the CIS has not been developed, let alone tested, and most construction firms operate accounting programs that will not be compatible with it. As a result, much of the industry is facing the prospect of installing and operating software that doesn’t exist, by a deadline that is more or less impossible to meet. And any firm that fails to achieve the impossible will be hit by fines for late payment.

Barry Stephens, chief executive of the National Federation of Builders, is in no doubt about the impact the April introduction will have on his members. “If this scheme doesn’t work, even if it is simply because the IT programmes are flawed, then companies could find themselves at risk of prosecution,” he says. “When you think of the number of companies subject to the scheme, and the number of transactions involved, it is frightening to contemplate the risk that the Revenue appears willing to pass to industry.”

This fear that companies may be prosecuted for late returns is common among industry representatives. Liz Bridge, the Construction Confederation’s taxation expert, said: “The failure to delay the start of the scheme will create commercial chaos for the industry, as well as significantly increasing costs among contractors.” The Federation of Master Builders agrees. A spokesperson says the FMB “is united with the rest of the construction industry, the CBI and the IT industry” in the view that an April launch will lead to chaos.

There are also fears among subcontractors that they will bear the brunt of extra costs. As well as late payment penalties, any firm that makes late returns risks losing its gross payment status. This in turn could create cash flow problems throughout the supply chain. Bridge says some subcontractors could even be forced out of business (see “A fiasco in the making”, right). The Electrical Contractors Association echoes her concern. ECA Director David Pollock says: “We believe that if the start date of April 2006 were to be maintained, there would be problems resulting in late payments to our members, putting cash flow under significant pressure.”

Why the software won’t work in time

We still haven’t received the final specifications from the Revenue … The implementation is going to be a disaster

Dennis Keeling

Dennis Keeling, who earlier in this article predicted that the new CIS would end up in humiliation for the prime minister, is well-placed to comment. He is the chief executive of the Business Applications Software Development Association, or BASDA, and it is his members that are putting together a program to run the CIS.

The reason for his pessimism is simple. “We still haven’t received the final specifications from the Revenue,” he says. “They were due in June and it’s now August. A parallel PAYE scheme was launched four years ago and it still has problems. The implementation is going to be a disaster.”

One technical problem that IT developers have already recognised is the possibility that the system could be floored by companies that trade under multiple names. Software experts have explained to the Revenue that many construction companies submit returns under multiple trading names – for example, as regional divisions of a main contractor. The Revenue, however, has refused to allow for more than one name for each umbrella company. This means that subsidiaries faces an impasse when they attempt to access the system: another route to late payment penalties.

But the bill faced by the industry will not simply result from fines. Most firms, though they may not yet realise it, will have to replace their entire business systems in order to comply with the scheme. This is because the Revenue has decided to move the CIS from the payroll software used by most firms to “access payable software”. This means replacing entire IT systems rather than simply upgrading them: a move that BASDA says could cost thousands of pounds for a small company operating a single-user package, and hundreds of thousands for larger firms.

Paper and telephone returns will still be permitted, but for any firm with more than a handful of workers such manual organisation will be impossible. Even firms with turnovers of less than £1m are faced with costly upgrades. Bob Vallis, of contractor Dorvale Construction, warns that many smaller firms will struggle to find the money to replace their systems. He said: “This issue can be sorted out, but firms need to have the technology. We used to get a tax break of 100% on vital IT equipment, but now that has been cut to 50%. If the government is going to ask us to do this, it would be nice if we could get a tax concession to make it possible.”

The Revenue insists that the changes should not come as a shock to the industry. A spokesperson said: “There has been regular dialogue about the new scheme since the 2003 Budget.” He added that the Revenue would shortly hold a further meeting with industry to explain how implementation is being phased to help ensure the transition is as smooth as possible.

However, there is a common feeling among the construction and IT communities that the Inland Revenue has sidelined the industry. Construction union UCATT says that although it has had some meetings with the taxmen, it has not been involved in any discussions on how they will distinguish between employed and self-employed workers since February. The union says this will hamper its efforts to advise members when the scheme is implemented.

Software representatives and construction trade bodies have called for a delay of at least six months to enable them to prepare for the start of the scheme, but the Revenue is adamant that this won’t happen. The spokesperson said: “The industry has already sought and secured from ministers a year’s delay from April 2005 until April 2006. The government would therefore be reluctant to see a further deferral.”

The CIS scheme may well be about to hit the industry harder than anything else in recent memory, but at least it confirms one well-known truth: tax, like death, really is non-negotiable.

How will the new system work?

The revised CIS scheme will affect any contractor or subcontractor that uses a self-employed workforce. Firms that directly employ all workers through the PAYE system will not be affected.

The current system

  • The employer determines whether a worker is employed or self-employed; the appropriate certificate is awarded and tax is deducted accordingly
  • Subcontractors must produce tax certificates and cards for workers when they take on new work from contractors, which generates a large amount of paperwork
  • Vouchers must be completed every time tax is deducted from a payment made to a subcontractor

The changes

  • Online test to determine whether a worker is employed or self-employed replaces cards and certificates
  • Online tool for verifying worker identity
  • Vouchers replaced by monthly returns that contractors must complete
  • Most returns to be filed online

A fiasco in the making

Liz Bridge of the Construction Confederation on why the new CIS will be an utter shambles

Why does anyone who knows anything about the planned changes to the new CIS scheme due to start in April 2006 feel either suicidal or murderous? Because we are just months away from a computerisation fiasco that will rival the Passport Office shambles and the Child Support Agency pantomime.

There are now only eight months to the start date and there is not a single piece of software commercially available – none has even been designed yet. The developers have not been helped by the Revenue’s insistence in the past few weeks that the system incorporate new security features. There are also no solutions as yet to how the scheme will handle mistakes made in earlier monthly returns, or errors in the calculation of tax and payment. If the procedures for correcting errors is not finalised, how can anyone design a system that will be able to reconcile a contractor’s payment with its monthly return to the Revenue?

But why can’t the Revenue delay for a year – or phase the changes in, as the industry has suggested? It says it is because the law cannot be amended so late on, and that a year’s delay would do us no good. In its opinion, we simply are moaning minnies and that we will never be ready to meet any start date. It has utterly ignored representations from the Association of Software Developers that the developers cannot be ready. It has similarly ignored a confidential memo from the largest provider of small accountancy packages to the industry, which expressed grave concerns.

So what can we expect in April 2006? At best, I hope we will just see the Revenue’s telephone lines and computer systems seizing up. At that point my federation will advise members to do their best but not to delay payments. If, after a reasonable attempt to establish whether a subcontractor should be paid gross or net, contractors find only scribble or the engaged tone, they should pay gross.

If we start with the view that if you can’t get proper reply from the Revenue, the only “safe” answer is payment after deduction of 30% tax – we will all go broke in the first week. So it is worth being clear now and going forward with one clear view. If the new CIS system blows up or fails on 6 April 2006, the loss must lie with the Revenue. They have been warned and must carry the can. A contractor who cannot verify subcontractors after that date must pay gross. If we slip from this position we will have subcontractors with the most terrible cash flow problems who will face bankruptcy. We cannot let this happen.

Liz Bridge was a member of the Joint Taxation Committee that discussed plans for an online CIS with the Revenue