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The Public Accounts Committee has found the government's tax system overpaid tax credits by £7.3bn in the first four years of the scheme and is still clocking up £1bn a year in overpayments.

Her Majesty's Revenue and Customs is trying to recover some £4.3bn of that from some of the most vulnerable families in the country. Delays in moving over to its new National Insurance Recording System mean that the backlog of 16m cases which need clerical checking is likely to increase.

Edward Leigh, chairman of the PAC, said: "HMRC should be more sensitive in how it deals with the recovery of overpayments. The Department is only now starting to introduce measures to support claimants, including helping them navigate the complex tax credit procedures."

The existing PAYE system was designed in the 1980s on the assumption that most people would continue to work for one employer. The new system is based on individuals rather than employers.

The tax credit system was designed for some overpayment to occur because it uses provisional data to make the payments at the beginning of the year. A final assessment at year end is based on actual circumstances. But the scale of these over-payments concerned the committee.

It leaves the poorest families in the country having to pay, on average, £770 a year back to the Revenue. The problems caused have left thousands of families in fear of having to pay back credits they have received.

Changes made in 2005 have helped the Revenue reduce overpayments from £1.9bn a year to £1bn.

Fraud and error are also an issue - HMRC lost between £1.31bn and £1.54bn in 2006 to 2007.

The system was provided by EDS between 1994 and 2004 when HMRC sacked them and gave the work to CapGemini. Both sides blamed the other for the failure of the project.

The full report is available as from here (pdf). ®

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