HM REVENUE and Customs left its online tax credit system open for more than two months after being warned that fraud may have been taking place.

Last week it emerged that tax credits had been systematically targeted by a gang of fraudsters after 13,000 employees’ national insurance records were stolen from the Department of Work and Pensions (DWP). At least 1,500 of these were used to make fraudulent claims.

HM Revenue and Customs (HMRC) says it shut down the online portal on December 1 “as soon as we noticed there was fraud taking place”.

It has now been established, however, that officials were alerted to a possible fraud last September.

That was when Jane Cherrington, a local representative for the Public and Commercial Services union and a checking officer at a job centre in Uxbridge, west London, contacted HMRC after noticing that her online tax credit details had been tampered with.

“I said it could be a potential fraud,” she said, but she was told that a possible explanation was that she may have changed the address details herself.

Cherrington was one of the DWP employees whose national insurance numbers had been stolen and whose tax credit account had been hacked into. Her call failed to alert investigators to the scam, which was by then becoming rife in the tax credit system.

In October a National Audit Office report said HMRC had its own evidence that tax credits were being targeted by organised criminals “particularly where they can make claims over the internet without proving identity”.

Despite the threat, users of the online tax credit system were still able to make claims without being required to prove their identity. Mike Warburton, a senior partner with the accountants Grant Thornton, said: “The system was fundamentally flawed because all you needed was a name and national insurance number to make a claim.”

The fraud is the latest in a series of problems for the tax credit system, which was one of Gordon Brown’s flagship projects. The system has been criticised by MPs as confused, chaotic and unreliable.

In the first year of operation of the new computer system, human error and electronic glitches led to a huge and unwarranted handout of public money. More than 1.8m awards were overpaid by a total of £1.9 billion, and many recipients complained of distress when the revenue demanded the overpayments back.

About 18 months ago applicants started reporting that their tax credits were being paid into other people’s bank accounts.

Helen Sanson, 33, from Norwood, southeast London, became a victim of tax credit fraud in October 2004 when her £80-a-month entitlement was siphoned into another account using just her name and national insurance number. The fraudster also embellished her details to claim an extra £1,420 a month for a disabled child.

“I could not believe someone could claim this money so easily,” said Sanson last week. “I found out the person had changed my details on the internet to an account held with Barclays and to a different address.”

Unknown to HMRC, a gang had obtained DWP staff assessments relating to spring 2004, which contained the names and national insurance numbers of about 13,000 employees in Jobcentre Plus offices in London, Glasgow, Pembroke Dock in southwest Wales and Ashton-in-Makerfield in Greater Manchester.

The gang set up bank accounts across the country and submitted claims using the stolen details. As fast as the payments came in, they sent out new applications for tax credits, which can be worth more than £10,000 a year. Complaints from worried applicants who thought they may have been the victims of fraud were put down to the usual computer glitches or errors by the claimants.

On Monday an internal DWP memo stated: “About 1,500 false claims using DWP staff details have been discovered. The staff details used by the fraudsters were national insurance number and dates of birth.

“The data which we believe was the source of the fraud did not include other staff details, such as bank accounts or home addresses. A team is working flat out checking the tax credit system to identify the fraudulent claims.”

Richard Bacon, the Conservative MP for South Norfolk and a member of the public accounts committee, said that even if tough new anti-fraud measures were implemented, they would not solve the system’s problems.

He said: “I believe the best thing to do is look at ways of unwinding the scheme. I don’t think a scheme of this complexity and uncertainty is tenable.”

HMRC estimates that about £30m a year is lost from the tax credit system as a result of crime, but says it does not know the potential losses from the DWP scam.

HMRC said this weekend that measures were being taken to reduce fraud.

A spokeswoman said: “We constantly monitor claim activity and act to intercept potentially fraudulent claims before payments are made, including those made through the e-portal.”

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