Priti Patel is said to want to change the law so migrants can be sent to a third country such as Turkey to await being returned to their home nation or the safe country they arrived from, according to the Daily Mail.
Gibraltar, the Isle of Man and Scottish islands are said to be among the locations that have been discussed by officials, according to reports.
Shadow home secretary Nick Thomas-Symonds said: “The Tories are lurching from one inhumane, ridiculous proposal to another.
“Last year they were talking about creating waves in the English Channel to wash boats back and buying ferries and oil rigs to process asylum claims.
“These absurd ideas show the Government has lost control and all sense of compassion. Ministers must act to reopen safe routes, as promised, and deliver the promised agreement with France.”
Gibraltar’s chief minister Fabian Picardo has written to Ms Patel to confirm that the reports are “groundless speculation” and to stress Gibraltar would be unable to host the processing of asylum seekers due to constitutional issues and the “geographical limitations” of the territory.
He said: “We will not ever shirk our responsibility to help wherever we can. Our geography makes some things difficult, however, and the processing of asylum seekers to the UK in Gibraltar would be one of them.”
The SNP’s immigration spokesperson Anne Mclaughlin MP said the Home Secretary had hit a “new low” with her plans, describing it as a “desperate rehash of a failed New Labour policy from 20 years ago”.
She said it was “disturbing” the UK Government was considering replicating the Australian style asylum system and added: “The UK government is committed under international law to provide a safe haven for those fleeing persecution – it must categorically rule out any option of offshore detention centres.”
Minnie Rahman, from the Joint Council for the Welfare of Immigrants, said the “half-baked proposal” will only create a “more dangerous and more unworkable” asylum system.
She added: “If the Home Office was serious about providing safety for people fleeing war, conflict and persecution, they would take practical steps which are based on evidence and reality, and stop using asylum-seekers as political football.”
Meanwhile, Gary Christie from the Scottish Refugee Council, called the plans “inhumane and cruel” and added: “We need grown-up solutions to the real-world problems facing refugees, the UK asylum system and the communities in which they live, not these outlandish and unrealistic plans. The UK must do better than this.”
The Home Secretary is expected to publish details of plans overhauling the UK’s asylum and immigration system next week.
Reports said the new legislation will include life sentences for people smugglers and the establishment of migrant reception centres on government land.
However, a Cabinet minister hinted the proposal was not an immediate priority of the Government, describing it as “policy work”.
Communities Secretary Robert Jenrick told talkRADIO: “I think the reports you have seen in the newspapers are speculation on policy work that the Home Office is undertaking and the Home Secretary will say more in the weeks ahead.
“But it has to be right that we have a robust immigration and asylum procedure where those genuinely fleeing danger can find refuge in this country.”
He said they did not want to see people in the hands of people smugglers, adding: “So if there are better and safer ways in which we can maintain that route to the UK for asylum purposes then it must be right that we explore them.”
Downing Street did not deny the Home Office is looking at proposals of using Gibraltar and other overseas territories to process asylum seekers.
The Prime Minister’s official spokesman said: “We’ve said before that we must fix our broken asylum system to make it firm but fair. As part of that, we’ve looked at what a whole host of other countries do to inform the plan for the UK and we will set out further details in coming weeks.”
The Government believes sending migrants to third countries for processing would be compliant with the European Convention on Human Rights (ECHR), according to reports.