Tax credit errors cost £1bn a year

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Some £65 billion has been paid out in tax credits since their introduction in 2003, but high levels of error and fraud and harsh procedures for clawing back overpayments have left some recipients wishing they had never got involved in the scheme at all, said the Commons Public Accounts Committee (PAC).

Error and fraud is running at more than £1 billion a year - the highest level of any Government department - while the ombudsman is still upholding 74% of complaints referred to him, more than on any other topic.

Some £6 billion has been overpaid in the first three years of the scheme, of which just £2 billion had been recovered by March last year. Around £700 million has been written off and HMRC is unlikely to get a further £1.6 billion back.

Although HMRC has increased its budget from £406 million to £587 million and boosted numbers of staff working on tax credits from 7,300 to 10,120, the situation is still "as serious as ever", said PAC chairman Edward Leigh.

Progress making changes in response to criticism from the National Audit Office, the Parliamentary Ombudsman and the Committee itself has been "disappointing", said the PAC.

Improvements have been made to the software blamed for much of the early problems, but computer errors continue to force staff to manually process some claims, and HMRC accepts the system is too "fragile" to be developed further without difficulty.

Meanwhile, the PAC warned that progress in recouping a £71.25 million compensation settlement from computer giant EDS has been extremely slow. It condemned an arrangement under which some of the money is linked to EDS winning new Government contracts as "invidious".

If the money is not paid by the end of this year, HMRC should be prepared to go back to the courts to force the company to pay up, said the report.

A spokesman for HM Revenue and Customs said: "This report relies on data captured only up to 2006. As a result of a series of improvements, overpayments have fallen by a fifth and accuracy in processing payments has reached 97%. HMRCs security measures stopped the vast majority of fraudulent claims before any money was paid out."