Blair sorry for tax credit fiasco

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But a report by the Citizens' Advice Bureaux revealed the devastating aftermath for thousands of families when the cash was clawed back. Some were forced to rely on Salvation Army food parcels, it said. Others had been obliged to give up work because they could no longer afford child care, while some had to resort to loan sharks to help them repay the money.

A second report, from the Parliamentary Ombudsman Ann Abraham, said the Treasury must write off the cash. Miss Abraham also accused Miss Primarolo of not giving a 'complete picture' in written answers to LibDem MP David Laws in February. Mr Laws asked five questions about the problems in the tax credits system.

The minister repeatedly insisted that things were 'markedly better' than a year ago - but did not admit that problems were ongoing. She said: 'The system has been stable and performing very well in terms of availability and speed for well over a year.'

Mr Laws, now LibDem Work and Pensions spokesman, said Miss Primarolo had been 'completely misleading'. He said last night: 'She tried to give the impression that there have been some problems at the beginning which were all now out of the way.

'It is quite clear that the Government has been both complacent and determined to play down the scale of this problem. Dawn Primarolo's job is now on the line.' Downing Street insisted last night that the Prime Minister had 'full confidence' in Miss Primarolo.

TABLES: Working and child tax credits and Child Benefit

Part of the problem in the system can be attributed to its complexitiess. The Inland Revenue - now known as HM Revenue and Customs - calculates tax credits retrospectively, meaning the money is paid according to what parents earned in the previous financial year.

Problems often arise because circumstances change year by year. If a parent has had a pay rise halfway through the year, their entitlement goes down. Any overpayment is then deducted from future tax credits without negotiation, slashing budgets and forcing families into the red.

Under pressure over the crisis at Prime Minister's Questions, Mr Blair admitted it was 'unacceptable' that people were facing financial difficulty. Challenged by Michael Howard, he insisted that tax credits were benefiting millions of families.

But he acknowledged errors had been made and added: 'For those families caused hardship or distress we apologise for that.'

The Government introduced two tax credits in 2003 to boost families' income: the child tax credit and working tax credit. The child tax credit is available to families on incomes up to £58,000, with children under 16 - around 5.8 million.

The working tax credit offers financial support to low income earners - around 1.8 million. The Treasury said the £600m of overpayment definitely attributed to errors would probably be written off, although this has only been done with £50 million so far.

Some £900m would probably be retained because the amounts involved were far higher than families had been entitled to. Recovery of the remaining £400million will be suspended until disputes about who was to blame are resolved. Miss Primarolo promised the system would be reformed.

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Case study

MALCOLM and Wendy Poole were overpaid £4,000 in tax credits - but astonishingly had to battle for more than a year to get the Government to take it back.

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Now they fear they may rue their diligence as the Treasury considers writing off the money. 'It would be galling to find out we could have kept it,' said Mr Poole, a 47-year-old computer manager. 'That money is fair compensation for their blunder, which has taken masses of time and paperwork to sort out.'

Mr Poole, a maths graduate from Leeds, initally fought for a year to get the right payment taking their children aged 14 and 16, into account.

When Mrs Poole, 45, a school assistant, was given a pay rise, her husband correctly notified the taxman. But instead of reducing their entitlement the system paid the family £4,000 extra. Mr Poole phoned the tax credit office to point out the error and ask how he could pay the money back - only to be told he should keep it until it was demanded back and 'enjoy the interest in the meantime'.

He said: 'I didn't want the money. I wanted to give it back but that seemed impossible.' He eventually paid it back through the Post Office. 'Luckily we had not spent the money, but lots of families will be struggling to pay it back,' he said.

Father of three Dave Papworth, of Swindon, was sent 13 different figures for the amount he was entitled to and queried the confusion with the tax credit office, who assured him everything was in order.

Then he was sent a letter demanding £1,400 after mistakes in calculating his credits. The office has now admitted responsibility for the errors but is still insisting on repayment.