PLANS for a complete overhaul of the Construction Industry Scheme (CIS) will move the burden of proof to contractors and could encourage tax evasion, it is feared.

Not only will construction companies be affected but any organisation which spends more than £1 million a year on construction work, such as hotels, retailers, hospitals and universities.

CIS rules govern how building contractors and their sub-contractors report income and pay tax to the Inland Revenue.

Most contractors have only just got to grips with the administrative burden created by the last CIS upheaval in 1999.

Now a further overhaul is proposed, putting even greater responsibilities and risks on to the shoulders of the contractors.

"While we welcome any attempt to simplify and streamline the current system, these proposals mean that contractors will have to take full responsibility for determining whether a sub-contractor is an employee or self-employed," said Mike Nagle of business advisers KPMG.

"They will have to provide an 'employment status declaration' to the Inland Revenue for each sub-contractor they hire, and if they make a mistake will face penalties."

Mr Nagle added: "The Inland Revenue wants to introduce a system that works through telephone and online verification, which is definitely a move in the right direction. But experience to date with online filing of tax returns shows that it is not as easy as it sounds and that the Revenue's computer systems are not always up to the task.

"Add to that the risk of penalties if contractors report the employment status wrongly, and there is a significant incentive for unscrupulous contractors to avoid the system altogether by making cash-in-hand payments - just what the CIS was set up to avoid.

"At the moment, the employment versus self-employment question is an enormous grey area, which even tax inspectors themselves wrestle with. To expect contractors to decide - often with only incomplete information to go by - is a little unfair."

The government has issued a 30-page consultative document on the revamp. The deadline for responses is February 28.