Tax credits were new Labour’s attempt to square the circle of benefits policy: how do you support people on low incomes without discouraging hard work? Gordon Brown’s big idea looked good on paper but has become a byword for confusion, maladministration and misery for some claimants.

As the new Shadow Chancellor in 1994, Mr Brown turned to Professor Richard Layard (now a life peer) of the London School of Economics for advice on welfare reform. The don suggested paying benefits through the Inland Revenue to encourage work, just as Bill Clinton’s Democrats had done in the US.

In theory, a tax cut for low earners could be administered by employers, rather than the State, and would stop people being trapped on benefits. Another advantage was that as they were technically negative taxation, the credits did not show up on the Government’s accounts as an expense.

Labour in the 1960s and the Tories under Margaret Thatcher considered tax credits of various kinds, but both rejected them as overcomplex and prone to fraud. The present system, introduced in 1999, has undergone several transformations. Since 2003 it has been built around a Working Tax Credit, which replaced elements of the working families’ tax credit, the disabled person’s tax credit and benefits for the over50s. Similarly, the Child Tax Credit combined other benefits for those on low incomes with children.

The credit is tested against the means of each family, itself a complication, as the Inland Revenue in 1997 collected information only on taxpayers as individuals. When a family’s means change, perhaps if a claimant becomes part of a couple or takes on new work, claimants are obliged to tell the taxman and the tax credits are recalculated. It is this that has proved to be the sting in the tail. Since they were introduced, many families have been paid more than their true entitlement.

Some people cheat the system, perhaps by pretending to be lone parents when they are receiving support from a partner. Many others suffered administrative errors when they told Revenue & Customs that their means had changed, but the system did not reduce payments quickly enough. For some, the system was so confusing that mistakes were easily made.

In an ideal world, families would know that they were receiving too much benefit, set it aside, and repay the excess when the Revenue sent a letter asking for it back. But in most cases that is an absurd idea. As one Treasury mandarin told MPs this year: “We do not expect them to be able to understand the whole calculation because that can be quite difficult.”

The result is heartache for hundreds of thousands of vulnerable people.

About 367,500 families appealed last year against the Government’s attempt to recover an overpayment. Today’s news should bring them hope.