Fraudsters are milking the tax credits system of more than £1bn a YEAR

Fraudsters are milking the tax credits system of more than £ 1billion a year, an inquiry by MPs found yesterday.

It is the biggest loss to cheating in any field of Government activity.

The failure is only the latest to be associated with the benefit, which critics suggest is fast becoming one of Gordon Brown's biggest disasters.

Tax credits are easy meat for conmen and some cheats are never discovered, the report declared.

The MPs also said that nearly £1 in every £10 paid out in tax credits is an overpayment. Some £2.3billion lost in his way will never be clawed back.

They warned that families who have stumbled into taking too much money were thrown into debt when told to repay the cash.

The MPs also highlighted the bill for running the bewilderingly complex tax credit network. It employs more than 10,000 civil servants at a cost that has risen to nearly £ 600million a year.

They added that a computer company responsible for failures in the tax credit computer system, EDS, has failed to pay back more than £ 26million it owes the taxpayer.

The scathing review was produced by the Commons Public Accounts Committee which acts as a watchdog over inefficiency, incompetence and crime in public spending.

"The tax credits situation is as serious as ever," said committee chairman, Tory MP Edward Leigh.

"Her Majesty's Revenue and Customs' attempts to bring the system under any measure of control have so far not been crowned with conspicuous success."

He said losses to fraud and the impact of overpayment were "great cause for concern" and added that the overpayment scandal meant that two million families every year face hardship in trying to clear their debt to the Government.

Tax credits were brought in by Gordon Brown as chancellor in 1998 as a benefit to lift millions of children out of poverty. From the first, they were directed at single mothers with the aim of persuading them to take jobs.

As a result critics have consistently charged that tax credits favour lone mothers over two-parent families and have called for a simpler way of helping low earners - such as simply raising income tax thresholds.

Labour MP Frank Field has said they "brutally discriminate" against couples. Others say the system has persuaded millions of couples to break up or live apart.

Yesterday's report centred on the latest version of tax credits, Child Tax Credit and Working Tax Credit, which were introduced in April 2003.

The two benefits are meant to help families with children and low incomes. Child Tax Credit, pays a maximum of £2,390, on a downward sliding scale.

Working Tax Credit, paid to those working for 30 hours a week or more, can amount to nearly £200 a week in some cases. On top of that working mothers can claim up to £240 a week to cover childcare.

The MPs said £65billion has been paid to tax credit claimants since April 2003.

"Tax credits continue to suffer from the highest rates of error and fraud in central government," they added.

"HMRC estimates that claimant error and fraud led to incorrect payments of between £1.04billion and £1.30billion in 2004-5."

But, they said, the department has yet to set targets for reducing fraud.

The report added that the tax credit system "accepts changes in home and circumstances notified to it by claimants, so erroneous or fraudulent disclosures may only be detected by post payment checking".

The MPs were also highly critical about overpayments to those who declare their correct incomes but then fail to tell Revenue and Customs in time if their earnings increase. Many are shocked to find benefits they have been paid for months must be paid back.

The overpayment trap is now affecting 1.9million families each year and debts of £ 6billion were generated in the first three years of the scheme.

Mr Leigh said: "This money is supposed to be recovered from claimants but £2.3billion worth has been written off." He added that "some families regret ever having become involved" in the system.