Tax credit fiasco costs £1bn a year

MPs have published a damning analysis of the tax credit system as fraud and error continue to cost the government £1bn a year.

The costs of running the scheme rose to £587m last year while HM Revenue and Customs failed to claw back millions from early IT problems, the Commons public accounts committee said on Tuesday.

Committee chairman Edward Leigh said the tax credits situation was "as serious as ever", with the department's attempts to bring the system under control having little success so far.

The MPs' eighth investigation into the scheme found that £6bn of overpayments had been made in the first three years of the tax credits initiative. In 2004/05 alone, the overpayments were as much as £1.3bn.

Tax credits continued to suffer from the highest rates of error and fraud in central government, and MPs noted that the department still had no targets for reducing the high levels of incorrect payments.

The department was also struggling to get the money back from the two million families affected. Just £2bn had been collected by the end of March last year. Another £700m had been written off, and £1.6bn of the remaining £3.3bn debt was not expected to be collected either.

At the same time, running costs had increased from £406m in 2003/04 to £587m in 2006/07, the MPs' report said.

And HMRC's main technology contractor, EDS, had failed to pay much of the settlement agreed following IT problems – even though it had been on the condition that it received more government work.

Leigh said: "It was always a very bad idea for the government to have to commission new work from the contractor EDS in order to recover compensation for the poorly performing tax credits computer system.

"In the event, EDS has stumped up very little of the £26.5m of the settlement to be paid under this arrangement.

"If the full amount of the settlement, £71.25m, is not paid over by the end of 2008, then HMRC must be prepared to return to the courts."