Hundreds of millions of pounds in British aid spending is returning to the Treasury each year in tax, thanks to the spiralling cost of housing asylum seekers in UK hotels.

The government says it is paying VAT on its bills for hotels to accommodate asylum seekers, while also classifying such spending towards its overseas development spending target.

Critics say the tax payments highlight the absurdity of counting payments to UK hotels as international aid, as well as the high costs of failing to tackle the backlog in asylum cases.

Sarah Champion, the Labour chair of the international development committee, said: “It concerns me enormously that the spending of ODA seems to be out of control, not transparent and not being spent on what it’s intended to.

“The fact that the Treasury seems to be making all the decisions without having clarity on where it’s going is something that should concern us all.”

Ranil Dissanayake, a senior research fellow at the Center for Global Development, said: “The mismanagement of the aid budget over the last few years would be farcical if the human cost wasn’t so severe.

“The costs run up by the Home Office, and charged to the aid budget, are made much worse by the slow pace at which it processes asylum claims. To discover that this also entails using aid to pay VAT in this country just underlines how little thought and sense has gone into this system. It needs reform, urgently, but it doesn’t seem like any is on the horizon.”

The government announced in 2020 it would reduce overseas development spending from 0.7% of gross national income to around 0.5%, not to return until the current account deficit is eliminated and debt is falling as a percentage of gross domestic product.

Under international rules, the costs of housing asylum seekers in Britain can be counted as overseas development for the first 12 months after they arrive, though the OECD gives countries the option not to. In previous years, this has taken up a relatively small portion of the UK’s aid budget – in 2016 it accounted for £410m, just 3.2% of the aid budget.

In recent years however the British asylum system has all but collapsed under its own weight. Since 2017, the number of asylum applications has risen by more than 160%. But the backlog of unprocessed claims has gone up by more than 400%.

As a result, the UK is now housing around 37,000 people in hotels while it processes their applications, at a cost of around £2bn a year – around 16% of the overall aid budget.

In a report published earlier this year, the international development committee said: “The recent increase in the proportion and sum of overseas development assistance disbursed on supporting refugees in the UK is unprecedented and unsustainable.”

A significant portion of that spending is returning to the Treasury, however, given that hotels charge 20% in VAT for their rooms for the first 28 days, and 10% after that. Even if all the hotel bills for asylum seekers were being paid at a 10% VAT rate, this would amount to £200m a year.

The Treasury said it was not able to say exactly how much of its hotel bills was VAT, given that hotels do not provide an exact breakdown.

A government spokesperson said: “All UK overseas development assistance is reported in line with OECD rules, and the government allocated £2.5bn additional resources at autumn statement to help meet exceptional costs of support for refugees.

“The UK remains a champion for the international development agenda and a major donor globally, spending almost £13bn last year, the third highest in the G7 as a percentage of gross national income.”

The UK is not the only OECD country where the cost of housing asylum seekers has risen steeply in the last few years. The OECD’s own figures show that the proportion of international aid being spent on supporting people inside the donor’s own country has gone from an average of around 3% in 2010 to around 14% today.

However, unlike the UK, some countries are now counting such spending as additional to their planned development budgets, rather than as part of them. Both Germany and Austria for example, have excluded the costs of supporting asylum seekers from their projected aid spending plans.