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February 2003

The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to comment on the latest proposals for taxing the construction industry and will be happy to participate in any future discussions.

The comments we make focus on the reform proposals contained in chapters 2 and 3.

We accept that it will probably be necessary to have a scheme for the future in order to protect the exchequer from a loss of tax revenue which may occur if CIS were completely abolished. It would however provide much greater credibility for the continuation of the scheme if statistics could be produced on current fraud levels even with CIS being in operation.

Scope of the scheme

i) This is an area which requires significant work to ensure the scheme is properly structured and must be developed to reflect the possible changes to the structure of the industry in the future.

ii) There needs to be a clear understanding of who is caught by the scheme, the role of Deemed Contractors, Managing Agents and Professional Firms. The actual tasks deemed to be within the scheme require clarification.

iii) The Inland Revenue must be capable of dealing in a consistent manner between tax payers, something which has been lacking in the current system.

iv) In view of the Inland Revenue stance on status verification there needs to be a simple definition as to what constitutes Construction activities which can be understood by non-tax specialists.

v) Consideration needs to be given to the treatment of 'Contractors' who are caught by the scheme even though construction activity forms only a small element of their turnover and is not their main business activity as in the case of utility companies. The way to deal with such situations may be to have a de minimus level of expenditure before there is a need to operate the scheme.

vi) The cap could lead to an onerous burden being imposed upon businesses due to the way in which businesses are now structured for operational purposes with decentralised activities through either divisions or separate companies but with a managed service approach to accounting and control activities.

Registration

i) The enhancements to the proposed process are welcome. We would expect the use of internet registration will allow twenty-four hours seven days a week accessibility. This is particularly important in light of the nature of modern business operations.

ii) The reliance on an effective IT solution is imperative and this needs to be fully tested and piloted prior to implementation. We do not wish to see systems failures occurring to undermine internet use, as has happened in other areas of taxation.

iii) There needs to be further consideration given to registration requirements for companies which happen to be both Contractor and Sub Contractor.

Verification

i) We welcome the proposal to dispense with the CIS 4, 5 and 6 documentation especially because of the onerous way it is required at present. The concern is however that fraud including identity theft will become easier. It will be necessary to examine and implement innovative new systems which will counteract fraud in all its guises otherwise we may well find a need to return to a paper based certification system.

ii) The issue of status checks needs to take account of the way businesses are structured as it may not always be possible to undertake this prior to the work being undertaken.

iii) For status checks to be effective they need to be undertaken by both the Contractor and Sub contractor.

iv) There needs to be a consistent interpretation of status under the new system as this is not happening currently and is placing contractors who apply it at a disadvantage to others where they treat the subcontractor as an employee.

v) The notion that the contractor should constantly test whether an individual is a sub-contractor or entering employment is likely to add a huge burden to the contractor. There needs also to be an independent system to settle disputes rapidly where the sub-contractor and contractor disagree on status.

vi) In meetings the Inland Revenue has suggested the concept of a gross payment cap. We are concerned that it may not work in all situations where a business operates on a decentralised basis, or outsources activities to a Managing Agent

Return of Information and Payment

i) Copies of statements sent to the subcontractor should also include details of materials they provided. We suspect many contractors do not fully reimburse for or even note small items which sub-contractors provide. Therefore where the subcontractor takes a deduction for materials the Inland Revenue will very rarely be able to find an audit trail back through statements if they try to cross check the amounts.

We consider it would not be appropriate for the Inland Revenue to waste either the contractor or sub-contractor's time in undertaking such verification exercises. It should suffice for the sub-contractor to produce an invoice.

ii) Consideration needs to be given to the move by business to use Credit Cards to pay for goods and services which may be caught by the scheme.

Systems

i) The new proposals will require significant systems changes for both the Inland Revenue and Businesses. The cost of this to business and the time scales required must not be underestimated. In this respect the 2005 possible implementation deadline is unrealistic.

ii) The Inland Revenue is relying heavily on interfacing with other IT systems to police the CIS proposals. We are concerned whether such grand IT plans will work effectively in a Real Time environment.

(iii) With regard to management reporting, it is essential that there is an adequate system to produce both standard and ad hoc reports as one of the current failures would appear to be accurate and up to date information to police the scheme.

Communications

i) An effective communication plan and training programme needs to be in place which is properly resourced and funded. The 1999 scheme introduction was inadequately explained and has contributed to its demise.

General Compliance Issues

i) We require a clear understanding of how the Inland Revenue will view breaches of compliance when issuing registration under the scheme and how an appeal process will work.

ii) There needs to be further discussion on how the various Inland Revenue compliance departments will investigate and monitor the scheme.

iii) Further discussion is required on what the penalty regime will be under the scheme.

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