Government plans to crackdown on employment agencies and payroll companies have sparked widespread panic in the industry.

One construction expert said: “This is a real game changer.

“The Government has tried to clampdown on this before with not much success. But this time it’s serious and will mean a massive move back to PAYE.”

Contractors are worried that they have bid long-term jobs on the basis of using self employed workers.

One said: “Taking people back on the books will add at least 25% to our costs when you factor in National Insurance and holiday pay.”

The new measures in the draft Finance Bill will hit at least 200,000 construction workers – with some experts estimating that figure could double.

One said: “Payroll companies and agencies have been a feature of the industry for years but these changes leave them in a very difficult position.”

The changes will result in an estimated £520m tax haul for the chancellor.

One contractor said: “The Government must think the industry recovery is real and we can wear these increases.

“The key going forward  is whether clients are prepared to pay more now cheaper firms using self employed workers will no longer be around.”

The industry’s leading payroll company said the planned changes will have a damaging effect on construction.

Hudson Contract said: “We agree with the principle behind the consultation to tackle false self employment brought about by the use of ‘contrived’ contracts that do not reflect the work place circumstances of those who sign them.

“Many agencies now use intermediaries – some even set them up themselves to pay temps on a self employed basis regardless of the work they do or the way they act or are treated in the workplace.

“Hudson Contract has always refused to operate in this way and never deals with employment agencies for this very reason.

“However well intended the proposed legislation may be, Hudson Contract believes that existing rules could easily be used to end these practices if HMRC were better focused and better motivated.

“One problem with an introduction of a new tier of legislation would be an outcome of unintended consequences of damaging the industry.

“The effects could be to slow down house building, increasing the cost of construction projects, driving down wages, forcing an increase in the black market and increased benefits costs, all of which would result in a reduced nett tax take.

“Freelance builders should not be targeted with blanket legislation.

“Despite rhetoric to the contrary, they are a key driver of the economy, they are an asset to construction, they are not a burden to the taxpayer, and at any one time the exchequer owes them £1bn due to the over collection of CIS at source – that’s a one billion pound interest free loan from construction subbies!

“Any measure that reduces the availability and effectiveness of freelancer builders is consequently bad for construction and UK PLC.”