We need a new tax

When Harold Wilson's Government, during a short-lived 1960s boom, introduced its selective employment tax on skilled operatives, virtually all construction craftsmen were directly employed by general contractors. However, the industry soon found that if operatives became self-employed, and were hired on a piecework basis, they could double their weekly earnings while reducing the cost to their contractors.

The flexibility and efficiencies that self-employment in particular, and subcontracting generally, created have enabled construction to survive the economic roller-coaster of the past 35 years. However, the innovation marked the beginning of the end for the antiquated collective bargaining apparatus that the unions and employers' organisations needed to justify their existence.

In response, the collective bargainers persuaded the Inland Revenue to introduce the first anti-self-employment regulations in 1972 – purportedly to prevent tax evasion – in a futile attempt to reverse the trend. The 714 tax-deduction scheme required subcontractors to register to receive their payments net of tax. Despite this unnecessary and restrictive regulation, self-employment and the subcontracting system gradually became the norm.

But the unions and employer bodies kept up the pressure for more restriction through more regulation. They got it first in August 1999 when the disastrous Construction Industry Scheme was launched, extending the scope of the 714 Scheme to require the registration of all companies, partnerships and self-employed individuals, including regular clients. The scheme also stipulated that every CIS-registered business support all payments with vouchers, copied to the Inland Revenue.

Then second, in November last year, the revenue produced a "consultative document" that (laughingly) professed to "reduce the regulatory burden of the scheme on construction business". In fact, the latest shake-up of the CIS will increase the responsibilities of, and penalties against, contractors. The new system – to come into effect by 2005 – places the responsibility for verifying workers' employment and tax status directly with contractors – and enables the Inland Revenue to fine contractors that get it wrong.

The government should take the politics out of the equation by introducing a right to be self-employed

I believe the real purpose of this exercise is to tighten up the regulation of construction so that the scheme can be extended to all industries. It is regulation purely for the restriction of trade and the harassment of smaller businesses.

The scandal is that the cowboy builder sector is exempted, because few domestic customers turn over more than £1m, and so do not cross the client registration threshold. The cowboy customers are therefore free to encourage unregistered cowboy builders to avoid income tax through cash payments.

There is a simple answer: scrap the CIS completely and use VAT-tracking software to collect income tax. The VAT system, which works well, does not require vouchers or status checks by contractors, and only quarterly returns are completed. It checks automatically the validity of each subcontractor's VAT number when the transaction is entered into the subcontract ledger and prints reports ready for the VAT compliance inspectors. The only replacement needed for the entire CIS would be a requirement for all businesses to publish their tax reference number on their stationery. The new VAT systems and procedures could then track all client, contractor and subcontractor-taxable payments automatically.

In parallel, government should take the politics out of the equation by introducing a simple universal right to be self-employed, subject only to publishing a tax reference number on all accounts. It should also ensure that the self-employed pay the same National Insurance as everyone else and have the same tax allowances as PAYE employees so everyone is treated equally.