Treasury admits £1.8bn of tax credit overpayments

There were calls today for the sacking of the government minister responsible for the tax credits system after an admission from the Treasury that almost £2bn had been overpaid for the second year running.

According to the latest figures, £1.8bn of tax credits was overpaid in the 2004/05 financial year, forcing families to face large repayment bills for the second year running

The number of families facing tax credit repayments has risen despite a fall in the total sum being claimed back by the government, the new figures showed.

More than 1.9m claims were overpaid last year, up 120,000 from the previous year, when charities warned some families were being forced into poverty by the debt.

Some £2.2bn was overpaid in 2003-04, resulting in £1bn of debt being written off by HM Revenue and Customs (HMRC).

The government insisted today that people will not be forced to reimburse the state if the overpayment is the system's fault, rather than a change in people's circumstances, as it admitted further overpayments would continue in the future

Overpayments are a part of the system which is designed to be flexible to take into account changes in income of families during the course of a year.

But the scale has been much higher than expected, forcing the Treasury to introduce changes, first outlined in the 2005 pre-budget report.

But the reforms were introduced too late to affect today's figures.

For some families, it could be the second year in a row that they are forced to pay money back to the government.

Further overpayments are nevertheless set to continue, as a minister confirmed that the new measures being implemented will reduce overpayments in future years by just one third.

The government says it wants to retain a "flexible and responsive" system, rather than fixed payments, so the level of credits matches families' changing needs.

The chief secretary to the Treasury, Stephen Timms, said overpayments have already fallen by more than a fifth since the first the year of the operation as he defended the system to help worse-off families.

"The tax credit system has delivered three vital improvements: it has increased incentives to work, reduced the tax burden on low-to-middle-income families and helped to sharply reduce child poverty," he said.

"Take-up of tax credits is at unprecedented levels with first year take-up of around 80% and 93% among the poorest.

"They have played a vital role in reducing child poverty, with 700,000 children lifted out of relative poverty since 1997." But the Liberal Democrats called on the paymaster general, Dawn Primarolo, to be sacked as they call for a whole-system reform.

The system has also been bedevilled by serious IT problems and targeted by organised criminal gangs using stolen identities to defraud the taxpayer.

Lib Dem spokesman David Laws said: "It is surely now time to replace the paymaster general, who through oversight, incompetence, or complacency has presided over a broken system rife with incorrect payments and fraud."

Mr Laws said the system needed to be overhauled, with payment levels fixed every six months to remove overpayment problems.

That would mean scrapping the current system, which takes account of alterations in people's incomes.

The government also faced criticism from one of its own backbenchers.

Frank Field, MP for Birkenhead, criticised the tax credit system for being a "blunt weapon" with which to tackle child poverty.

"While their cost is the equivalent of 5p off the standard rate of tax, the target of cutting child poverty by a quarter over five years has been missed. Worse still, for the second year running, one in two tax credit payments is wrong," he said.

"The income of poor families is liable to swift change. Tax credits are clearly the bluntest of anti-poverty weapons and are the equivalent of attempting delicate keyhole surgery with a hacksaw."

The Tories also attacked the government over the tax credit system.

The shadow paymaster general, Mark Francois, said: "This government is in meltdown and they have Gordon Brown to blame for it. He has created a system of tax credits which is far too complicated. Apart from failing the needy, the system is not fit for purpose."

"Gordon Brown needs to acknowledge whether the ongoing problems are a result of his obsession with fiddling and complexity or gross failure of his ministers and department to administer the payments effectively."