The IR35 tax regulations are unfair and harm UK competitiveness, according to the Institute of Chartered Accountants for England & Wales (ICAEW).

The controversial reform, introduced in April to crack down on contractors' tax allowances, was awarded a mark of zero out of 10 for fairness and encouraging trade and investment in the UK.

The Inland Revenue shows no sign of backing down, describing the report as "astonishing". "We don't accept the Institute's judgement on this. As far as we are concerned, it has been designed to promote fairness by closing an acknowledged loophole in the tax and National Insurance system," a Revenue spokesman said.

The Revenue has received 1200 enquiries from anxious contractors, and says that the majority of contracts fall within the IR35 net.

Contractors hoping to lighten the Revenue's burden will have to prove they work independently of a client company, relying on their own resources, and that they are able to provide a substitute worker to cover in their absence.

The report criticised the consultation process, awarding the Revenue two out of 10 for the way it approached the pre-legislative discussion stage.

The Professional Contractors Group seized on the findings. "The government should scrap it and make the UK the place for ebusiness," spokeswoman Susie Hughes insisted. "Otherwise I would assume that the Prime Minister is content for his ministers to introduce second-rate legislation."

The government's own assessment of the reform said it could lead to the closure of 66,000 single person service companies, although it hopes to raise around £400m through additional National Insurance revenues.