Tax credit error 'could cost £500m'

HM Revenue and Customs failed to tell families who had been given too much money that their payments were being reviewed.

As a result overpayments to tens of thousands of households, worth an estimated £500 million, may have to be written off or given back.

Shadow chancellor George Osborne has called for an investigation into the entire tax credit system in the wake of the revelations. He said: "Look at the small print and you will see that this latest tax credits fiasco happened on Gordon Brown's watch.

"He must take responsibility and he must answer the key question - when did he first know there was a huge problem and how long did he keep it secret?

"Even now the Government is covering up the full truth. We need full disclosure of the scale of this problem, how many claimants are involved, how much the Treasury will have to pay back and what the administrative cost of putting it right will be."

The tax credit system, the brainchild of Prime Minister Gordon Brown when he was still Chancellor, has been plagued with error since its inception.

The extent of the new difficulties came to light after a whistleblower at the agency told the Tories the cost of repayment could exceed £500 million, plus £200 million more to rectify the problem.

Officials failed to follow Section 18 of the Tax Credit Act 2002 which requires the agency to notify households under investigation over suspected overpayment.

The problem was first raised in a brief written statement released just before the House of Commons rose for summer recess.