Gordon Brown was accused last night of presiding over incompetence on “an industrial scale” as a damning report found that his tax credits system had cost the public almost £2 billion through overpayments, errors and fraud.

The Chancellor will launch his campaign to become prime minister on Friday after facing calls to clear up mistakes in the running of tax credits, his most cherished redistributionist policy in his ten years at the Treasury. The system receives withering criticism today from the all-party Commons Public Accounts Committee, which states that £5.8 billion was wrongly paid out in the first three years after the credits were introduced in 2003.

HM Revenue and Customs has already written off £557 million of this, and is unlikely to recover a further £1.4 billion, the committee said.

It accused the department of failing to tackle “the highest rates of error and fraud in central government”, which undermine “HMRC’s reputation for accuracy, fairness and proper handling of taxpayers’ affairs”.

“The design of the internet system for tax credits was deficient from the outset and left it vulnerable to attack by organised criminals,” it added.

The criticism last night gave new ammmunition to Mr Brown’s Opposition enemies.

George Osborne, the Shadow Chancellor, said that the report revealed incompetence on an industrial scale. “Tax credits are in Gordon Brown’s empire and he cannot blame anyone else for the appalling levels of error and fraud. The Chancellor leaves the Treasury trying to hide the cost of his mistakes while his reputation for economic competence continues to unravel.”

David Laws, the Liberal Democrat work and pensions spokesman, said that tax credits were “set up with the best of intentions”, but because of “systemic failures and administrative incompetence it has become a system which many of the most vulnerable are scared to enter.”

He added: “Before the Chancellor moves to No 10, he must first face up to the very real problems his tax credit system is bogged down in, rather than trying to sweep all criticism under the carpet.”

Child Tax Credit and Working Tax Credit are a central part of the strategy to boost the incomes of low wage-earners and families, but their credibility has been damaged by a series of critical reports.

The PAC found that the recovery of overpaid credits caused hardship to many claimants who have to pay money back, usually because their circumstances changed over the year and they are no longer entitled to the same level of help.

Recent changes designed to reduce this problem, which mean that claimants do not have to make repayments unless their income rises by more than £25,000 in the course of a year will cost the taxpayer a further £500 million annually, the committee said.

In order to make the scheme accessible to claimants, HMRC adopted a “pay now, check later” approach that relied too heavily on detecting false claims and then recovering the money, leaving the system vulnerable to fraud.

The department also ignored mandatory security guidance set out by the Government’s own e-envoy, opening the way for “sustained fraudulent attacks” by suspected organised fraudsters which cost £131 million in 2005-6 alone.

The tax credits website therefore had to be shut down in December 2005, and is unlikely to reopen before next summer.

Edward Leigh, MP, the committee chairman, said it was extraordinary that HMRC “does not have up to date information on the amount of public money lost through claimant error and fraud” and has not set targets to reduce these levels. “Billions of pounds, far more than those who thought up the system ever envisaged, are still routinely overpaid to claimants. HMRC seems incapable of mounting a credible and effective response to the flood of money being wasted.”

Opposition parties condemned the waste of taxpayers’ money highlighted in the report, and sought to pin the blame firmly on Mr Brown.

An HMRC spokeswoman said that changes being implemented will “improve certainty for families” and “are expected to reduce overpayments by a further third”.

£2bn could buy

75,021 nurses
62,694 teachers
18,868 doctors
54,137 police officers
65,998 soldiers
325,203 hip replacements
1,176 MRI scanners
671,141 primary school places

It costs

£80.65 per household
£33.22 per person
£67.34 per taxpayer
£117.65 per family

source: Conservative Party

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