Page last updated at 13:00 GMT, Thursday, 12 July 2007 14:00 UK

Tax credits 'costing 1bn a year'

Gordon Brown after 2003 Budget
Gordon Brown launched the tax credit system to great fanfare in 2003

Losses from the government's tax credit system are "unacceptably high", the National Audit Office (NAO) has said.

A report from the spending watchdog found the system was losing up to 1bn a year through fraud and errors.

It also found that almost half of the 2.3bn that was overpaid to claimants in 2003/04 had yet to be recovered by HM Revenue and Customs by April 2007.

But the government said fraud and error rates were falling after moves were taken to tackle the problem last year.

Financial Secretary Jane Kennedy explained that fraud and error rates had fallen by a sixth since HMRC took over the running of the tax credit system from the Inland Revenue.

"Information on organised fraud shows that HMRC is successfully stopping the majority of claims identified as being submitted by organised fraudsters," she added.

But Shadow Chancellor George Osborne said that this was "a totally unacceptable scandal" and called on the new chancellor, Alistair Darling, to reduce the level of fraud and error.

Action urged

According to the NAO, fraud and mistakes led to losses of between 1bn and 1.3bn in the tax credit system during 2004/05.

"Once again, the levels of claimant error and fraud in the tax credit schemes are unacceptably high," said NAO comptroller and auditor general Sir John Bourn.

"This has led me to qualify my audit opinion on regularity of these payments.

"It is important that the department now targets reductions in levels of error and fraud and considers how its compliance teams can engage more widely with tax credit claimants."

The reputation of HMRC for competence looks increasingly threadbare as revelations of this kind become public
Edward Leigh, Commons Public Accounts Committee chairman

Since its launch in 2003, the system has been plagued by complexity, overpayments and fraud.

High levels of fraudulent claims by gangs or organised criminals led to the tax credit website being shut down in 2005. However, figures show that the system has still lost 40m to fraud this year.

Elsewhere problems with overpayment - which HMRC always admitted would emerge as claimant's circumstances changed - may also lead to losses of 1.6bn having to be written off, the HMRC has admitted.

In May, the Treasury admitted a total of 1.8bn was overpaid in 1.96 million claims during 2004/05.

However, it also added that the figure was substantially lower than the 2.2bn paid out in 1.88 million claims in 2003/04.

Under fire

The problems have led to widespread criticism of the system, with Edward Leigh, chairman of the Commons Public Accounts Committee which oversees the work of the NAO, attacking the "staggering" waste of tax payers' money.

He also claimed that the overpayments problem was putting families through real hardship as they battled to repay the HMRC.

"The reputation of HMRC for competence looks increasingly threadbare as revelations of this kind become public," he added.

Further figures from the NAO are also likely to draw criticism for the embattled tax credit systems as they show that as losses are soaring, so are costs.

According to the report, HMRC now has more than 10,000 tax credit staff, costs have risen 45% over the past four years, and legal action has been launched against tens of thousands of families as the service attempts to claw back overpayments.

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