HM Revenue and Customs has announced that it will investigate hundreds of recruitment firms suspected of running tax avoidance schemes, reports the Daily Telegraph.
The Revenue has promised to crack down on recruitment agencies that are thought to be using expenses schemes for temporary staff.
The schemes are thought to cost the UK taxpayer close to £400m each year.
The schemes involve allocating an amount of each worker's weekly wages as 'travel and subsistence'. Recruitment firms are then able to claim tax relief on those expenses which is then banked as profit rather than passed on to the employee.
The Telegraph investigation reveals that recruitment agencies are banking as much as 88% of the tax relief under the expenses schemes, when they should only be receiving 30%.
A spokesman told the Telegraph that HMRC would be launching a full investigation into the matter: "These kinds of arrangements do not comply with tax rules and may result in workers not being paid the minimum wage. Employers who use these kinds of arrangements risk penalties from HMRC and the loss of their gangmasters' license."
Industry insiders claim that the use of the scheme within the industry is 'rife'. One estimated that around one fifth of the UK's 1.3m temporary workers are being exploited in the scheme, and believes that each could lose as much as £30 per week.
HMRC are aware of such schemes and have already published information on their use for the industry. However, it is believed that hundreds of agencies are continuing to flout the law, in spite of legal advice to the contrary.
Andy Hogarth is the chief executive of Staffline, an agency which supplies temporary staff to Tesco and DHL.
"Recruiters do this to undercut all the legitimate operators. HMRC cannot police it and there's huge confusion over what's right and wrong," he told the Telegraph.
Recruiters face inquiry over £390m 'tax avoidance' scheme (The Telegraph)