Revenue slammed over huge overpayments

He acted after the department belately revealed how samples of credit applications two years earlier had revealed error rates of 10% to 14% by value - totalling £510m to £710m in a full year.

The figures were immediately taken by the Tories to discredit the government's flagship tax credit welfare policy - already subject to huge criticism over the delays introducing child tax credit and working tax credit earlier this year and claimed difficulties with the pensioners' credit.

Bourn said the IR 'was only able in August 2003' to provide him with the results of its examination of samples taken in part of 2000/2001 and did not explain the reasons for the delay.

He also revealed that it had not undertaken similar exercises for 2001/2002 and 2002/03 - again giving no reasons for the omissions but recorded the IR's claim 'that they had incorporated the lessons learned into the design of the new tax credits' whose flawed introduction causedÿchaos.

Bourn concluded: 'The level of overpayment identified by the department is cause for serious concern.'

The NAO conclusions will place even greater pressure on Revenue chairman Sir Nick Montagu who has been under constant fire over the past few months because of criticisms of the department. Montagu is due to retire next year.

Sir John said the main reason for the latest errors were understated or undeclared income or capital and a failure to declare a partner - the bane of predecessor welfare benefit schemes many of which were themselves the source of repeated account qualifications.

He said the 2002/2003 levels of error would not necessarily be as high as those for 2000/2001 since changes had been made to the compliance regime, but he had seen no evidence to demonstrate the error rate had been reduced significantly and concluded that the probable error rate was still 'unacceptably high' and issued his qualification accordingly.

His report noted the 'serious problems' with the new tax credits from April caused by computer system faults which slowed down the system and resulted in erratic performance - which was initially concealed from their own ministers.

There were also problems with the timing and frequency of notifications to employers to start, vary and stop payments to employees and the note warned of 'a considerable challenge' reconciling emergency manual payments to claimants.

In addition the IT system has been unable to support reconciliations.

The Revenue admitted it will not be fully back on track until the end of 2004/2005 and are discussing compensation with systems provider EDS.