Revenue & Customs have issued a warning to recruitment agencies that it will be taking sterner measures against employers who are abusing tax concessions for temporary workers.

Ministers have become increasingly aware of the growth of schemes that convert an element of a worker’s pay into tax-free expenses. In some cases, the employer takes the bulk of the saving with little benefit to the worker.

The dramatic increase in the use of such tax schemes has prompted some recruitment agencies, who view the practice as unacceptable, to take a stand. They claim that the aggressive tactics used introduce unfair competition as rates can be significantly undercut.

One agency spokesman claimed that the schemes were unethical and potentially illegal because they sometimes left workers with less than the national minimum wage. In addition, he discussed the potential losses to the Treasury in tax and national insurance contributions.

The Revenue has said it is investigating the agencies and will be challenging any found to be breaching the rules. Ministers would then decide on “the extent to which compliance is able to address the undesirable effects of these schemes and whether further measures are required”.

Companies taking advantage of the tax concessions use a bridging employment contract to link a series of separate work placements. Thus, the worker is deemed to be working at temporary workplaces and can claim tax relief on travel between home and work.

While the schemes are not necessarily illegal, the Revenue said it had found numerous infringements. In response to tackling the issues, the government has opted for an increased focus on compliance rather than further legislation.

Colin Breed, a Liberal Democrat MP, called on the government to consider retrospective action. “Companies are using tax avoidance to gain a competitive edge,” he said. “At a time when trying to collect as much revenue as possible, we need to close as many loopholes as possible.”