Watchdog attacks Inland Revenue's accounts

The Inland Revenue was facing a fresh barrage of criticism yesterday after Parliament's spending watchdog qualified its accounts because of continued problems with the tax credits system and leaked memos revealed that IT foul-ups are hitting the collection of taxes.

Sir John Bourn, the head of the National Audit Office, said the level of claimant error and fraud in the new tax credits system introduced by the Chancellor remained "unacceptably high" as in 2003-04, the department - now part of HM Revenue & Customs - overpaid £2.2bn in tax credits, forcing it to attempt to claw back the money in the following year. This resulted in mayhem, hardship and confusion for millions of claimants.

The NAO said although there was "some limited interim evidence" that claimant error and fraud was falling, it remained too high in amount and percentage terms. Sir John said the department needed to do more to ensure confidence in the system was not undermined by unacceptable levels of unjustified payments and also understand better how to help claimants who had been overpaid.

The department's latest accounts show although £2.2bn was overpaid in 2003-04, nearly half of this may not be recoverable as it has made a £961m provision for doubtful debts for the two-year period from 2003 to 2005.

Sir John also disclosed that an internal audit by the department revealed "significant and widespread" errors in collection of Paye. This had resulted in about £575m of revenues a year not being pursued while taxpayers were not being advised of about £295m a year potentially repayable to them. The Inland Revenue collected £257bn in taxes last year.

The shadow Chancellor, George Osborn, said this latest NAO report was "yet another damning indictment" of the tax credit system. "When the accounts of the taxman itself are qualified you know Gordon Brown has created a giant mess that millions are struggling to make sense of," he said.

Meanwhile, Revenue & Customs was under fresh scrutiny over IT-related difficulties. Today's edition of Computer Weekly claims these have affected the normal collection of taxes and delayed enforcement action to recover unpaid taxes. According to leaked memos passed to the magazine, the full processing of Paye returns sent in by internet was delayed by four months while tax officials have been forced to contact employers to find out their tax position.