MPs accused Revenue & Customs yesterday of “incompetence” over its handling of the errors and fraud that have undermined Gordon Brown’s flagship tax credits system.

David Varney, chairman of the Revenue, was told by members of the Commons Treasury Select Committee that they had been besieged with complaints from constituents who had been overpaid and were facing claims for repayment.

The commitee heard that the Revenue made overpayments worth £2.2 billion to 1.9 million families in 2003-04. Though figures for 2004-05 were not yet available, the Revenue expected mistakes “on the same scale”. The Revenue has acknowledged that £961 million of this money is likely to be irrecoverable.

Mr Varney told the committee that overpayments were made because recipients failed to report changes in circumstances, or the Revenue failed to detect the changes.

Leading a chorus of criticism, John McFall, the Labour MP for West Dunbartonshire, told Mr Varney he presided over an “incompetent system and management approach”. Another committee member described the controversy as a “catalogue of misfortunes”.

Mr Varney was also warned by MPs that he may be recalled for another hearing.

This week the National Audit Office (NAO) refused to give a clean bill of health to the tax credits section of the Inland Revenue’s accounts for the third year in succession. Sir John Bourn, head of the NAO, said that he took this action for the Revenue’s 2004-05 accounts because the level of tax credit fraud was still “unacceptably high in both amount and percentage terms”.

On Monday the Commons Public Accounts Committee (PAC) also revealed that in 2003-04 the Department for Work and Pensions (DWP) lost an estimated £3 billion to fraud and error out of its total spending of £109 billion.

Edward Leigh, Tory MP for Gainsborough and chairman of the PAC, called for a reduction in the high level of error by staff making benefit payments, which was costing an estimated £1.5 billion a year.

• The Conservatives launched a commission to review the tax system yesterday. It will be chaired by Sir Christopher Gent, chairman of GlaxoSmithKline, the drugs company.

  The ten-strong body, whose remit is to produce proposals for “simpler, flatter and fairer” taxation, includes Lord Forsyth of Drumlean, a former Tory Cabinet minister, David Frost, of the British Chambers of Commerce, and Graeme Leach, of the Institute of Directors.