HM Revenue & Customs (HMRC) has been forced to develop a strategy to reduce error and fraud after the National Audit Office (NAO) refused to sign off its accounts for the sixth consecutive year on discovering as much as £1.5bn may have been overpaid in tax credits.

Tim Burr, NAO head, described the levels of tax credit error and fraud as ‘significant’ compared with the expenditure of the scheme. HMRC has announced it plans to reduce overpayments to less than 5% by 2011.

‘HMRC now has a target and has developed a strategy for reducing error and fraud. It will need to monitor how the measures it adopts are contributing to the achievement of the target and to respond effectively,’ Burr said.

The NAO report reveals that, in the four years since the tax credits scheme was introduced, the department has overpaid by £7.3bn. According to the report, claimants have not always understood their obligations or received the support they needed from the department.