In a press release from the IER, author of the report, Dr Mark Harvey said: 'We have found disturbing evidence that the Inland Revenue and the Contributions Agency have sanctioned large-scale false self-employment by a consortium of 16 large contractors in London and the South East Region.'

Entitled 'Undermining Construction: The Corrosive Effects of False Self-Employment', Dr Harvey's report questions whether the increase in the numbers classed as self-employed really reflects the actual employment status of construction workers. It claims that false self-employment in the industry is directly costing the exchequer between £1.5 billion and £2 billion each year.

This, states the IER, amounts to a subsidy from the tax payer to the construction industry of 2p in every pound; it estimates that as many as 361,000 construction workers in Britain are falsely registered as self-employed.

In response the Inland Revenue dismissed the report's findings and denied allegations that it has encouraged tax or National Insurance evasion of any kind. A spokesman said yesterday (Monday): 'If the author has any evidence of tax evasion, he should contact us directly.'

George Brumwell, General Secretary of the Union of Construction, Allied Trades and Technicians (UCATT), which commissioned the report, described false self-employment as being a scourge in the construction industry for the last thirty years. He said: 'Employers have used the current system to mis-categorise construction workers and deny them their basic employment rights. The culture of lawlessness within the industry has to be tackled.'

The report concluded by calling for a major change in the law and tax regulations to eliminate false self-employment in UK construction and to generate much needed income for public services.