Inspectors need new powers to tackle conservative faith schools which are “spreading beliefs that clash with British values”, a major Ofsted report will say on Wednesday.

An increasing number of ultra-religious schools are teaching children in a way that threatens to undermine principles of tolerance and respect, according to the school inspectorate’s annual report.

Amanda Spielman, the chief inspector, will say that laws do not go far enough to combat illegal schools, and that spreading "shared values" will be one of Ofsted's key priorities for the year ahead.

"Current legislation is inadequate to tackle unregistered schools. It limits our powers and allows institutions to exploit loopholes about definitions of education,” the report is expected say.

“The existence of unregistered schools is possible because there is no requirement to register a child as home educated, so there is no record of children who have never been in school.”

Last month, The Daily Telegraph revealed how extremist groups are exploiting a loophole in the law by encouraging parents to pull their children out of mainstream education on the pretence that they will be home-schooled.

However, in reality the Government has no way of checking what has happened to pupils once they are withdrawn from school since there is no national database of children who are home-educated. Once they are under the radar, children can be easily fed into illegal schools.