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 HMRC is dealing with a backlog of 41,000 cases still open relating to schemes aimed at small businesses and individuals – with £10.2 billion at stake.

The scale of the potential avoidance was described as "eye-watering" by senior MPs.

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Despite efforts by HMRC to tackle the problem, the NAO said it was struggling to cope with the 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.

Margaret Hodge, chairwoman of the Commons Public Accounts Committee, said it was essential HMRC got to grips with the problem. "People who pay their taxes promptly and in full will be dismayed to discover 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 what is due from all individuals and companies."