Ministers will substantially reduce the scope of the loan charge, a penalty HM Revenue & Customs (HMRC) has issued to 50,000 self-employed IT contractors, management consultants, locum doctors and nurses.

Several workers complained that the penalties had driven them to bankruptcy or led them to sell their homes because of the bills issued to them.

Many workers also complained that they had been assured by accountants that the systems they were using operated within tax rules.

A review published by Sir Amyas Morse, former head of the National Audit Office, found that the clampdown went too far by backdating the penalties over 20 years, causing many workers “serious distress” and financial woes.

Mr Morse added that the government had failed to get the balance right between tackling avoidance and protecting the rights of taxpayers, The Times reports.

Responding to the review, ministers announced last night that the loan charge would now no longer apply to anyone who entered into a scheme before December 9, 2010, when targeted anti-avoidance legislation was introduced that Sir Amyas said had removed any doubt about the rules, rather than from 1999.

Additionally, people who used loan schemes between December 9, 2010, and April 5, 2016, but who had disclosed them on their tax returns would also not be subject to charges.

The government then admitted that 30,000 out of 50,000 of those who had faced charges and back-tax bills would be given some money back. Of this figure, 11,000 would be left with no liabilities whatsoever.

The Treasury would not say how much the refunds would be, but HMRC has in the past estimated that its total tax take from the loan charge would be £3.2 billion.