Overpayments are still a big problem, say MPs
Another £1.4bn is likely to be written off in overpaid tax credits, according to a report from a committee of MPs.
The Public Accounts Committee said this would bring losses from overpayments to £1.9bn. A revamp to the system meant it would pay £500m more a year, it added.
The new tax credit system started in 2003, but it has been plagued by complexity, overpayments and fraud.
HM Revenue & Customs (HMRC) said that overpayments had fallen by a fifth between 2003-04 and 2004-05.
Money 'being wasted'
"Billions of pounds, far more than those who thought up the system ever envisaged, are still routinely overpaid to claimants," said Edward Leigh MP, chairman of the committee.
"Very large amounts have to be written off. And the attempts to recover overpayments from genuine claimants have caused significant suffering to many vulnerable families.
"And HMRC seems incapable of mounting a credible and effective response to the flood of money being wasted in this way," he added.
So far £500m of the tax credit overpayments from the first three years has been written off.
At the end of March 2006 another £3.6bn in overpayments was outstanding, but the MPs think that £1.4bn of this will also have to be written off as unrecoverable.
Despite this, HMRC said that overpayments had fallen by a fifth between 2003-04 and 2004-05.
"Accuracy in calculating and processing tax credit awards has risen to over 97% and HMRC are making good progress in implementing the package of measures announced in the 2005 pre-Budget report," said a spokeswoman.
Overall the MPs believe that HMRC still has not got to grips with running the tax credit system properly and that its recent changes may not make much difference.
They point to the continued high level of fraud, which saw the tax credit website shut down in 2005 because of fraudulent claims by gangs or organised criminals.
It will probably not re-open for people to lodge their claims online until 2008.
"The department has still not developed an adequate response to the unacceptable levels of error and fraud in the scheme," said the MPs' report.
Of the £47bn paid out in tax credits in the first three years of the current system, £5.8bn was overpaid to claimants.
One of the main reasons was down to the fact that if a claimant's income rose by more than £2,500 during a financial year, this triggered an obligation to tell HMRC, who would then calculate how much of the tax credits should be refunded.
This led to widespread problems, with claimants, often on very low incomes, being asked to repay money they had spent in good faith.
Many said that the fault for their overpayments lay with miscalculations by HMRC staff rather than any mistakes they might have made on their applications.
In 2005-06 there were 367,500 disputed overpayments, 44% of which led to the money being written off.
To remedy the administrative problem caused by the need to notify rising incomes, the government has introduced a new rule from the start of this tax year.
This means that the threshold for notifying HMRC of any increase during the financial year has risen to £25,000.
"Once these measures are fully implemented they are expected to reduce overpayments by a further third," the HMRC said.
However, the Public Accounts Committee says that although this will eradicate some of the overpayments that might have been made under the previous rules, the new threshold will itself lead to an extra £500m being paid out each year.
The MPs recommended that HMRC speeded up even more the process by which it confirms each claim that has been made for the previous financial year.