Brown is told tax credit has undermined fraud inquiries

The fight against tax fraud has been undermined by the introduction of the Government's tax credit schemes, public spending watchdogs say in a report which is published today.

The Public Accounts Committee say that the Inland Revenue's investigations of tax fraud "appears to have reduced as work on tax credit fraud has increased, despite additional resources being provided". The MPs' criticism will fuel the controversy over the introduction of new tax credit schemes from April last year, such as the child tax credit; the introduction of which has suffered teething troubles. The Tories say the scheme should not be administered by the Inland Revenue.

The committee say the Revenue sees civil penalties, such as repayment, as its primary weapon, but called for greater consistency in the scale and nature of sanctions applied by the Government.

On the Revenue's wider efforts to combat fraud, the MPs say there was no official estimate of the loss to the Exchequer. The report says: "The low number of fraud investigations and prosecutions is not commensurate with the potential sums at stake in lost revenue. Nor has the overall scale of work kept pace with the expansion in the Revenue's business."

The MPs believe it would be cost-effective for the Revenue to carry out many more investigations. Edward Leigh, the Tory MP who chairs the committee, said last night: "With only 400 serious fraud investigations a year against 30 million customers, those contemplating tax fraud may well calculate that the chance of being caught is remote." The MPs found that there were only 60 prosecutions a year for serious fraud.

The Revenue collects about half of all public revenue - some £214bn in direct taxes and national insurance contributions a year from around 30 million taxpayers. It also hands out £5.7bn in tax credits to more than one million claimants on low incomes, a figure that is to rise this year to more than £15bn.