£6bn was wrongly paid out in the tax credits fiasco

Fraud and error cost at least another £1.3 billion, with organised criminals stealing millions through a badly-protected Government website.

Huge sums were also mistakenly paid to Eastern European migrants who continued raking in the credits after they returned home.

Up to £2 billion - enough to pay for 80,000 nurses - is unlikely ever to be recovered, according to the Commons spending watchdog.

MPs on the Public Accounts Committee blasted ministers for failing to tackle the 'unacceptable flood' of tax credits overpaid or lost through mistakes and fraud.

The all-party committee found Chancellor Gordon Brown's flagship system was still in meltdown, despite repeated promises that it was being improved.

The Revenue overpaid £2.2 billion in child and working tax credits in 2003-04 and £1.8 billion in 2004-05, a sum expected to be mirrored when figures are calculated for last year.

Most families were told to repay about £1,000 but others were hit by demands for several thousand pounds. These low-income families would suffer 'significant hardship', says the report. It is estimated that two million households have been affected.

Tax credits were launched in April 2003 in an attempt to encourage people into work.

Cash is paid directly to families and those with jobs and can top up earnings by as much as £5,500 a year.

Claimants must predict their income on the basis of last year's wages, then payments are clawed back if they start to earn more.

MPs criticised the Treasury for skimping security on the tax credit website, set up to allow families to claim payments by computer.

Officials failed to build in proper protection against fraud, ignoring Government guidelines.

The report said: "The ability to claim tax credits through the internet was particularly appealing to organised criminals as it allowed them to submit multiple claims quickly with impunity."

Treasury officials closed the website in December 2005 and it has not yet re-opened.

George Osborne, the Shadow Chancellor, said: "Tax credits are in Gordon Brown's empire and he cannot blame anyone else for the appalling levels of error and fraud.

"This is incompetence on an industrial scale and it is the low paid in our society who are paying the highest price."

David Laws, the Liberal Democrat work and pensions spokesman, said the report was a 'terrible indictment' of the tax credit system.

He said: "Levels of fraud and error in tax credit payments remain unacceptably high, creating huge waste and often placing the families in receipt of incorrect payments in real distress and financial hardship.

"The system was meant to help the poorest families in society but due to systemic failures and administrative incompetence it has become a system which many of the most vulnerable are scared to enter."

A Revenue and Customs spokesman said: "We are making good progress in implementing measures to increase the flexibility of tax credits and improved certainty for families."