The government is making a raft of changes to the controversial loan charge, after an independent report found the policy — which has been linked to several suicides — has caused people "serious distress".
The review by Sir Amyas Morse, the former chief of the National Audit Office, also said the government had failed to get the "balance right" between tackling tax avoidance and protecting the rights of taxpayers.
Campaigners welcomed the changes as a "big step forward" but said it was wrong that people still faced "retrospective" tax bills, warning that it set a "dangerous precedent".
The policy had left more than 50,000 people facing huge tax demands on income dating back 20 years. It has been linked to seven suicides as well as bankruptcies and marriage breakdowns.
The government says the contractors affected — including IT workers, engineers, nurses, and social workers — used "disguised remuneration schemes" to avoid taxes. But many workers were assured by accountants at the time that this was legal, and some were even told they had to use the schemes to keep their jobs.
The report, which was published on Friday on the last day of parliament before the holiday break, was commissioned by prime minister Boris Johnson as more than 200 MPs, including many Conservatives, raised serious concerns about the policy.
In a statement, Morse said: "The foundation of our tax system is fairness and where this is undermined through avoidance schemes it is right that these are tackled. However, in doing so, the government and HMRC [Her Majesty's Revenue and Customs] must act proportionately and responsibly.
“As my review makes clear, the design and delivery of the loan charge didn’t get the balance right between tackling tax avoidance and protecting the rights of taxpayers and, in some cases, has caused serious distress to the individuals affected.
"I’m pleased to see government commit to act on the recommendations of my review, bringing the loan charge back into line with the wider tax system, better protecting those who are least able to repay and providing certainty for all those affected."
The government said the changes would reduce bills for more than 30,000 people subjected to the loan charge, including an estimated 11,000 who would not have to pay anything.
The government accepted most of Morse's recommendations. Rather than going back 20 years as before, the loan charge will now only apply to outstanding loans made on after Dec. 9, 2010.
It will not apply to people who used the schemes between Dec. 9, 2010, and April 5, 2016, and fully disclosed the schemes on their tax return.
People will also be able to split their loan balance over three tax years to make bills more affordable, and lower earners will get more flexibility on how to pay the money back.
But the government did not accept Morse's recommendation that those earning less than £30,000 a year should have a maximum repayment period of 10 years, with the outstanding balance written off after this time.
Morse said this would "allow people to move on after paying what they can afford" — but the government said it would "treat tax avoiders more favourably than other individuals with HMRC debts".
Jesse Norman, financial secretary to the Treasury, said: "We welcome this careful and considered report, and I thank Sir Amyas and his team for their work. There have been important public concerns about this policy, and that is why we commissioned this report and have responded so quickly to it.
"The changes we are making go to the heart of Sir Amyas’s concerns about the fairness and application of the loan charge, which he accepts in principle. We also have plans underway to crack down further on the promoters of these avoidance schemes."
Steve Packham, spokesperson for the Loan Charge Action Group which represents affected freelancers, said: "We welcome that it’s now been accepted that it is wholly unacceptable for this retrospective law to apply as far back as 1999, which was disgraceful, and that closed years prior to 2016 will no longer be subject to the loan charge.
"These are things that clearly undermined the rule of law. However we continue to believe that the loan charge should not apply retrospectively at all and are concerned that many people will still be seriously impacted.
"This is a big step forward, with a clear commitment that this dreadful law will be changed, a law that has already tragically cost lives. The Loan Charge Action Group will continue to campaign for all those facing the loan charge and we will be working with supportive MPs to push for fairness for all those facing the loan charge."