Charity Commission head William Shawcross has been summoned to appear before the Public Accounts Committee after details emerged of how a charity scam was able to avoid paying £46m in tax.
Despite the Commission investigating the Cup Trust, a so-called children's charity, it managed to keep trading because it had not broken any charity laws.
Tax campaigner Richard Murphy described the Cup Trust scheme - run by the same tax advisers that advised comedian Jimmy Carr last year - as "just a giant ruse".He called on the Commission - an organisation he dubbed a "toothless watchdog" to "get its act together".
The Mirror reported how The Cup Trust is run by advisers Anthony Mehigan and Matthew Jenner, the duo behind a tax avoidance scheme used by the millionaire comedian and other wealthy investors.
Murphy, who estimates the scheme could have deprived the Treasury of up £100m, said: 'The charities sector has to be properly regulated and it needs to be given its own general, anti-abuse rule.'
Where existing laws enable such schemes to flourish, Murphy says the law needs to be tightened up to clamp down on rogue elements in the sector.
MP Margaret Hodge, chairman of the Public Accounts Committee, described the scheme as "perhaps the worst" she had ever seen.
Mehigan and Jenner's firm, NT Advisors, were behind the scheme that attempted to reduce the tax bills of wealthy individuals such as comedian Jimmy Carr by around £200m.
The Trust had employed an offshore bank loan to buy £1m gilts, which it then sold to investors who had paid a fee to join the scheme, for a nominal fee. The Trust then donated around £500 to charity on the investors' behalf. The investors then sold the gilts and "donated" the money to the Cup Trust.
Depending on what level they paid tax, it then allowed the investors to claim between £250,000 and £375,000 in gift aid relief. At the same time the Cup Trust used the "donation" to repay the loan.
The Cup Trust's cynical one page, 100-word website says it makes grants to smaller charities that help children and young adults. It received private donations totalling £97.58m in 2009/10 and £78.93m in 2010/11.
However it declared that it spent nothing on charitable causes in 2009/10, and just £55,000 a year later.
Its accounts reveal that over the two years it spent £176.4m buying government bonds - some 99% of its income - and later sold the majority, or even all the bonds, for a paltry £17,000. Just £107,145 remained on the balance sheet in its accounts for the year ending March 2011.
The sole trustee - Mountstar (PTC) Ltd - is registered as based on the tax haven of Tortola in the British Virgin Islands.