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The costs of the new construction industry scheme (CIS), which is due to come into force from 6 April 2007, have been vastly underestimated according to the Institute of Chartered Accountants in England & Wales (ICAEW).

The scheme will operate very differently from the current one. Broadly, the existing system operates with exemption certificates, registration cards and annual returns - these will all be replaced by a new system which will be heavily reliant on online facilities and a monthly return.

HMRC’s own estimate of the annual cost to business of the new scheme is £30 million and it was on the basis of this estimated figure that the Treasury approved the launch late last year. This estimate however comes from a Regulatory Impact Assessment (RIA) approved by the Paymaster General, Dawn Primarolo, back in March 2004 and these costs are in addition to the other costs associated with employer’s tax obligations. It also does not take into account the initial costs of purchasing new software for the scheme, installation and training. The ICAEW have suggested the scheme could cost nearer £250 million - £280 million a year.

The cost of the CIS scheme has however been vastly underestimated before. The figure provided by the HMRC for the initial scheme was £52 million from a previous RIA.

In contrast a report by KPMG on behalf of government published in March 2006 showed that the actual costs to the construction industry to be more than six times the HMRC’s stated cost. The report entitled Administrative Burdens – HMRC Measurement Project, revealed that the total administrative burden is £321 million, the sixth biggest burden to business compared to pensions at £294 million and VAT at £1.02 billion.

The report also reveals that the administrative burden of the current CIS scheme is falling heavily on sole traders (£96m) and micro firms (£181m) compared to £6 million on medium sized companies and only £1millon on large companies - this despite the fact that the construction industry is only the fourth biggest employer in the UK behind manufacturing and retail.

Howard Royse, ICAEW’s construction industry representative and a practitioner, said:

“It calls into question HMRC’s ability to assess accurately the workings of the industry, not least their estimate of unpaid tax that they claim is attributable to the incorrect treatment of subcontractors.”

Snapshot interviews conducted by the ICAEW with some of the largest firms in construction found that they were already achieving a tax compliance rate of over 90 per cent.

Mr Royse added:

“HMRC needs to set out their target levels of compliance for the industry.”

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ICAEW