The government is to use a six year old EU procurement directive to ban companies and individuals involved in failed tax avoidance schemes from securing public contracts.

The rules, which will come into effect in April 2013, require potential suppliers to disclose their recent tax compliance history, and specifically to reveal whether a tax return has recently been found to be incorrect as a result of a tax avoidance challenge or if there has been any involvement in a failed tax avoidance scheme.

The announcement comes in the wake of the launch of the tax administration research centre, which will focus on tax avoidance and the OECD report which called on governments to modernise their tax systems to catch international companies that dodge paying corporation tax.

Angel Gurría, head of the OECD, said the G20 needed to act this year to combat avoidance, which he said was undermining the ability of governments to recover from the financial crisis. He said the failure to crack down on “the big guys” would leave small and medium-sized businesses and middle income taxpayers to pick up the tab for vital public services.

“Companies have a responsibility to pay corporation tax in the jurisdictions where they operate. Citizens are already losing faith in their banks and the financial system. If big corporations fail to pay tax and leave it to SMEs and middle income groups, it will undermine democracy. This is about the survival of democracy,” he said.

The announcement that the G20 meeting in June will discuss an action plan to curb tax avoidance will put further pressure on companies to choose between public service contracts and cutting their tax bills. It is unclear whether any taxation changes could be enforced in the procurement process under current EU legislation, but there is provision for contracts to be terminated if there are further breeches of existing tax avoidance measures.