A major Revenue & Customs (HMRC) inquiry into the tax credit system failed to identify at least £850m that was believed to have been lost through fraud and error, the government's independent auditors have found.
Tax inspectors predicted they would cut losses by £1.4bn in 2010-11 through a national two-year crackdown but their efforts reduced the total by less than £500m, the National Audit Office (NAO) said.
Instead of almost halving error and fraud rates from 9% to a target of 5%, tax inspectors only managed to reduce it to 8.1%. This resulted in losses of £2.27bn.
Margaret Hodge, chair of the public accounts committee, which published the findings in a report released on Thursday, said much of the missing money was due to HMRC error, not fraud.
"[HMRC] set itself a target ... which it missed by a mile. According to HMRC's own figures, the majority of this £2.27bn – £1.6bn – was due to error rather than fraud by claimants.
"I also find it deeply worrying that even after HMRC has taken action, one in five claims still contain error or fraud.
"[HMRC] needs to inject much more rigour into its collection and analysis of data, particularly around changes in claimants' circumstances, where mistakes are most likely to be made," she said.
About 400 extra staff were switched to the two-year push, which HMRC estimates helped prevent an extra £230m a year being paid out.
The NAO welcomed what it said were "innovative" measures that had begun to show results in tackling particular problems.
But it noted that HMRC had targeted cases most likely to be affected and that one in five of all claims – 1.4m – were still being overpaid.
There had been "little progress" in dealing with people failing to declare partners' income or in checking claimants' stated work and hours, it said. The two areas accounted for £1bn of the fraud and error in 2010-11, while £640m was down to children being wrongly included in claims.
Amyas Morse, the head of the National Audit Office, who last year declined to sign off HMRC's accounts because of tax-credit fraud and error, said HMRC faced "significant challenges".
"The tax credit system is complicated, and HMRC will have to overcome significant challenges if it is going to achieve value for money," he said. "To tackle error and fraud effectively, there needs to be an improved understanding of risks and better use of information."
Tax credit payments are based on estimates of income – which critics say leaves the system wide open to abuse.
HMRC estimates that up to £4bn of tax-credit debt is unlikely ever to be recovered and has already been forced to write off large sums. They are one of several different welfare payments being brought together in the universal credit in an effort to simplify the system.
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