Liberal Democrat Social Security Spokesman MP David Rendel said all new applications for Jobseeker's Allowance and some incapacity benefits are being paid "blind" after the National Insurance Recording System II (NIRS II) failed, erasing personal records.

The failure of NIRS II, which could affect more than 80,000 benefit applicants, means that the Department of Social Security cannot verify claimants' eligibility.

'Most complex contract in Europe'

Neither can it legally reclaim any excess "interim" payments that have been made, potentially resulting in an "error loss" running into millions of pounds.

Mr Rendel said NIRS II - which cost £170m and was once touted as "the largest and most complex IT contract in Europe" - was put into service on 13 July before proper checks were carried out because the government was "panicked " by delays to the system which should have gone online in February 1997.

The Contributions Agency, which keeps national insurance records, attempted to play down the NIRS II failure, saying that a back-up system was in place and that only a small, undisclosed number of claimants would be affected.

In these cases, claimants who are unable to provide P60 forms, pay slips and other documentation have been given interim payments that have no legal standing and cannot be used as a basis for related payments like Housing Benefit or Council Tax Benefit.

'No upper limit to loss'

The NIRS II system should be operative again by October, but fears have been raised that the benefits system will be open to benefit fraud on an unprecedented scale in the intervening period.

A spokesman for the DSS said: "If legally we overpay someone and it's our mistake, we cannot legally reclaim it from them.

"We can let them know and rely on their better nature."

Mr Rendel said: "At this stage there is no known upper limit to the extent of Government expenditure losses."

The NIRS II system was built under a private finance intitiative in conjunction with Andersen Consulting. The company had its contract renogiatied in 1996 and it was subsequently forced to pay compensation for late delivery.

The Benefits Agency will continue to make interim payments of between £30.30 and £50.35 a week to claimants who are unable to provide sufficient "employment contribution data" until such time as the NIRS II system is reinstated.