The Treasury is losing billions of pounds in revenue due to the failure of HM Revenue and Customs (HMRC) to clamp down effectively on aggressive tax avoidance schemes, the Whitehall spending watchdog has warned.
The National Audit Office (NAO) disclosed that HMRC is currently dealing with a backlog of 41,000 cases still open relating to schemes aimed at small businesses and individuals - with £10.2 billion of tax revenue at stake. The scale of the potential avoidance was described as "eye-watering" by senior MPs.
Despite efforts by HMRC to tackle the problem, the NAO said it was struggling to cope with the sheer volume of schemes being "mass-marketed" - often by small specialist tax advisers whose business model relies on helping their clients to avoid paying tax.
While the HMRC believes most of the schemes are not valid and would be "defeated" if tested in the courts, closing them down can take years of lengthy litigation.
Margaret Hodge, chair of the Commons Public Accounts Committee which oversees the work of the NAO, said it was essential HMRC got to grips with the problem if the public was not to lose confidence in the whole tax system.
"People who pay their taxes promptly and in full will be dismayed to discover that the enormous level of tax avoidance taking place is overwhelming HMRC's efforts to combat it. The scale of the problem is staggering," she said.
"Without a credible plan to resolve these cases and to stamp out future avoidance, the public will lose confidence in the tax system's ability to collect even-handedly what is due from all individuals and companies."
Since 2004, promoters who design and sell such schemes have been required to notify HMRC under a regime known as Disclosure of Tax Avoidance Schemes (Dotas). The NAO said that while Dotas had helped HMRC to identify and close down legal loopholes, it had had little effect on the overall scale of tax avoidance activity with "no evidence that the use of such schemes is reducing".
A HMRC spokesman said: "HMRC has successfully challenged over 40 tax avoidance schemes through the courts in the last two years alone, successfully disrupting the avoidance industry through a combination of legal challenge and improved intelligence on new schemes, and protecting around £4 billion.
"But as the avoidance landscape changes, so must our approach. The Government is building on Dotas to give HMRC stronger powers to obtain information. These, together with the introduction of an anti abuse rule in 2013 will further strengthen our anti avoidance work."