Tax credits chaos leaving thousands out of pocket

Gordon Brown faces embarrassment today as two scathing reports into his flagship tax credits policy warn that it is causing misery for tens of thousands of families. The Chancellor has championed the idea of integrating benefits into the tax system as an incentive for making work pay.

But his tax credits initiative, launched two years ago, got off to a shaky start with almost half of claimants receiving the wrong amount and with payments beset by computer problems. HM Revenue and Customs (HMRC) has admitted that 1.9 million claimants, out of 5.7 million, have been overpaid and face demands to repay the money. Another 700,0000 were underpaid.

Ann Abraham, the Parliamentary Ombudsman, complains in a report today of inherent faults within the system and comes close to accusing a Treasury minister of misleading MPs over its efficiency.

Meanwhile, the Citizens Advice Bureaux (CAB) discloses that it has handled 150,000 problems with tax credits, including cases of families threatened with eviction or having to rely on food parcels to survive.

Ms Abraham says: "The greatest difficulties are suffered by the core group that the tax credit system is aimed at helping - namely, families on low incomes.

"Many families report having to borrow money from family and friends to support their children, using up their life's savings or running up credit card debts in order to pay for childcare costs, buy foods and get to work."

Although she acknowledges that the concept of tax credits was based on "very laudable policy intentions", she argues that it is too inflexible and has been "plagued with significant and extensive technical problems".

Ms Abraham points out that HMRC and Dawn Primarolo, the Paymaster General, had assured Parliament that the tax credits system was working well. She says: "The cases I have investigated lead to me to the conclusion that such reassurances did not give a complete picture of what has been happening and the devastating effects the IT problems have had on some individuals' lives."

The CAB says incomprehensible award notices meant many people were unable to understand their entitlement or spot frequent mistakes. Telephone advisers could not provide accurate information and letterswere sometimes not answered for months. "The result," it says, "is growing disillusionment with tax credits, putting at risk the success of key government policies on promoting work for low-income families ... eliminating poverty, and increasing people's capacity to save."

A spokeswoman for the HMRC said the system had experienced an "unprecedented take-up", with the vast majority of claimants experiencing no problem.

Although HMRC has made progress in persuading people to file their tax returns on time, an estimated £1.1bn of income tax was owed the Treasury from overdue tax returns in July 2004, the National Audit Office reports today.