MPs have slammed the Inland Revenue's "nightmare" tax credits system and said it may have been "fatally undermined by its intrinsic complexity".
A report by the Public Accounts Committee (PAC) calls the new tax credits system "frustratingly arcane" and says it has failed to cut fraud and instead routinely overpays hundreds of thousands of genuine, and often vulnerable, claimants.
The report also questions the department's ability to rectify the problems and get the tax credits system working properly.
The government introduced the new tax credits in April 2003 to replace the Working Families and Disabled Person's Tax Credits. The new system was intended to be simpler and cut high levels of fraud and error in administering the old credits.
But the system has been dogged by problems from the outset. First several hundred thousand claimants were not paid on time and then a software error on the EDS-designed system resulted in a total of £100m of overpayments to 455,000 households in 2003.
Fraud and error rates under the old system were estimated to be between 10 percent and 14 percent. The Inland Revenue claimed the new tax credits would reduce this to around 5 percent but PAC said there is no evidence this reduction has been achieved.
The department also discovered in 2003 that routine housekeeping software had incorrectly deleted almost one million taxpayer records between 1997 and 2000, resulting in more than 360,000 unidentifiable taxpayers not receiving repayments worth £82m and 22,000 others not paying £6m of tax that was due.
The software was intended to cleanse the databases of cases more than three years old where the department's work had been completed but the software also deleted live cases. The department now stores deleted taxpayer records on a back-up file so it can reconstitute the information if it is needed.
Edward Leigh MP, chairman of PAC, said there is still a lot of work to be done to get the tax credits working fairly and effectively but questioned the department's ability to do this, especially given that staff are also tackling the backlog of ordinary tax collection work that has built up as a result of fire-fighting the tax credits problems.
Leigh said: "The Revenue has yet to produce reliable evidence that the flood of public money being wasted under the previous tax credits scheme through fraud and error has been stemmed to any degree. There is a general lesson here: that an ambitious scheme might be fatally undermined by its intrinsic complexity."
HM Revenue & Customs, the recently-merged Inland Revenue and Customs & Excise department, is considering its legal options after previous IT supplier EDS rejected a compensation claim for unsatisfactory system performance. A more severe penalty regime that affects the price of the contract has since been put in place with its new supplier Capgemini.