Julia Kermode, the founder of iwork.co.uk, which protects the UK’s independent workforce, said there is a “compelling case” for regulating the sector which has a number of “dubious operators” associated with it, such as the loan scheme promoters.

The loan charge, announced by government in 2016, was designed to tackle tax avoidance schemes where individuals receive income in the form of loans that are not repaid to avoid income tax.

A large number of workers on modest salaries – including frontline NHS workers – have been hit with life-changing and unexpected tax bills due to the loan charge.

Evidence uncovered by the Loan Charge All-Party Parliamentary Group found that, in the vast majority of cases, these arrangements were not entered as aggressive tax avoidance and were often a condition of employment, especially in the public sector.

A substantial number of people, especially in the public sector, did not know or understand that their pay arrangements involved loans, according to the APPG.

Rebecca Seeley Harris, Chair of the Employment Status Forum and James Poyser, CEO of inniAccounts and founder of offpayroll.org.uk, have submitted a draft policy entitled ‘Umbrella companies – Call for Regulation’ to the Treasury and the Department for Business, Energy and Industrial Strategy.

Their proposals call on Rishi Sunak to use regulation to halt dishonest behaviour in the umbrella sector, which includes the practice of withholding holiday pay, making incorrect payments of employers’ national insurance contributions, and the abuse of employment allowance tax relief. Critics claim that this misconduct leads to HMRC and staff being cheated out of billions of pounds.

The use of tax avoidance schemes, including the use of so-called ‘‘mini umbrellas companies’’ are estimated to cost workers and HMRC around £1bn annually, the report claims.

Ms Kermode said: “For far too long umbrellas have been in the too difficult pot with the government failing to properly understand the sector, failing to plan effective policies, and failing to take action. Umbrella regulation is long overdue now, and there is no excuse for the current hiatus.

“We urgently need a strategic approach which cuts across all relevant government departments and puts workers’ best interests at the heart of any regulation.”

Dave Chaplin, the chief executive of ContractorCalculator, who supports amendments tabled to the Finance Bill by David Davis MP, which aim to combat malpractice in umbrella firms, said: “The worse the level of malpractice, the greater the rewards for the mischief, and the greater the kickbacks for agencies, all helping to promote a self-fulfilling downward spiral, funded by pickpocketing both the Treasury and hard-working people’s pay packets, without their knowledge.

“There are umbrella companies that run a vanilla compliant operation, with no reward schemes for agencies, and which treat workers fairly with reasonable charges, but they find it harder to access the market, because they lack the financial firepower to purchase space on an agencies Preferred Suppliers List – for which six-figure sums can be exchanged.

Mr Chaplin added: “Often, where the contractor does spot malpractice and complains, the umbrella first attempts to dismiss the claim.

“If the worker seeks justice via legal means, then the umbrella agrees a “negotiated settlement” (a COT3 agreement) which includes a gagging clause.”

“The malpractice needs to stop and we would urge MPs to vote on the chosen amendment so that the sector moves towards one where the cowboys are driven out, allowing the compliant parts of the sector to get on with their jobs to support the contracting sector.”

A spokesman said the Government was placing a priority on protecting and enhancing workers’ rights through robust regulation.

The spokesman added: “We have already introduced requirements to improve the information provided to new agency workers about their contractual terms and pay rates, and have committed to establishing a single enforcement body to further protect vulnerable workers.”

The spokesman added: “The UK has one of the best workers’ rights records in the world, including generous holiday pay and high standards for workplace safety.

“We have updated guidance on mini umbrellas companies (MUCs) fraud, published 10 May, on GOV.UK and will be sharing with stakeholders and advocates, and we will continue to work with trade bodies and other government departments to raise awareness of MUC fraud https://www.gov.uk/guidance/mini-umbrella-company-fraud

“Our Fraud Investigation Service is using its civil and criminal powers to challenge those who are involved and facilitating mini umbrellas companies fraud, including recently deregistering more than 22,000 mini umbrellas companies who we believe are exploiting the VAT Flat Rate Scheme and removing their access to the Employment Allowance.

“In 2017, HMRC introduced the Trader of Limited Cost Legislation, after seeing a surge in the number of MUCs. This helped to remove a number of businesses setting up MUCs and hence reduced their number.

“The Government has committed to introducing legislation to expand state enforcement for agency workers to cover umbrella companies.

“This will enable inspectors to investigate complaints involving an umbrella company and take enforcement action where required. This action will focus on situations where agency workers have not received adequate pay and will protect decent employers from unfair competition.

“We have already introduced a requirement to improve the information provided to new agency workers about their contractual terms and pay rates, through a ‘Key Information Document’.”

A spokesman added: “We’ll consider amendments to the Finance Bill in the usual way.

“The Government has committed to extending the remit of the Employment Agency Standards (EAS) Inspectorate- the regulator of employment businesses and employment agencies – to include umbrella companies.

“Once this has been done, the EAS will be able to investigate relevant complaints relating to umbrella companies and seek compliance from them as they currently do with employment businesses and agencies.”