The Government’s controversial tax credits system is so flawed that there are doubts about whether it can ever meet the needs of the most vulnerable families it is designed to help, a report said today.

Ann Abraham, the Parliamentary Ombudsman, said the way the system was set up, with annual calculations of claimants’ benefit based on past income, meant overpayments were inevitable. In each of the first three years that tax credits have been operating, since their launch in Apri 2003, these had amounted to between £1.5 billion and £2.2 billion.

When the Revenue attempted to claw back these overpayments, often running into thousands of pounds, it caused distress and hardship to families on the lowest incomes, who suddenly found themselves with a debt to repay.

Ms Abrahams criticised “the unduly harsh nature” of Revenue’s formula for deciding when to claw back an overpayment, which meant it sought to recover the money in the vast majority of cases, causing extreme worry to many low income families.

She said: “Tax credits are supposed to help families not cause them money worries.”

In some cases, families’ experience of the tax credits system was so bad that they said they would never apply again, rgardless of whether they were entitled to or not.

A spokeswoman for Citizens Advice, a charity that offers free financial and legal advice, said it shared Ms Abraham’s concern that the flaws in the system would put people off applying for tax credits.

In its own survey, also published today, Citizens Advice reports that almost half of the respondents it polled said they would be less likely to claim tax credits as a result of their experiences. Eight in ten said they had been overpaid and seven in ten said they had faced a clawback of these overpayments, with their tax credit payments suddenly cut or stopped without warning or explanation.

A spokesman for the Revenue said: “Tax credits benefit some 6 million families and nearly 20 million people. The cases the Ombudsman reviews are small in number and tend to be the most difficult. We are already consulting on changes to the code of practice on recovery of overpayments to improve outcomes for customers.”