£700m black hole in Brown reforms

GORDON Brown's benefit reforms suffered a disastrous setback when it was revealed that overpayments are as much as £700m a year.

Whitehall watchdogs said the old working families and disabled persons tax credits saw huge amounts too much paid to claimants who failed to declare their incomes fully.

And they warned that the new tax credits regime the Chancellor brought in to replace that system in April is also in deep trouble.

Ministers deliberately delayed the savagely critical report from the National Audit Office. They hoped that releasing it to coincide with President Bush's visit would ensure minimal coverage.

But the scale of the financial mess could not be concealed. The Audit Office said problems that dogged the introduction of the new child tax and working tax credits - which meant thousands of poor families did not receive their payments - would not be overcome fully until 2005.

In a stinging rebuke to the Chancellor and the Inland Rvenue, which runs the scheme, the Audit Office's head, Sir John Bourn, said the level of overpayments was 'unacceptably high'.

He officially gave notice that he had 'qualified' his audit of the Revenue's accounts. This means Sir John, the guardian of the Government's financial probity, is not satisfied with them.

He also warned that the Revenue will have to work hard to ensure the problem with new tax credits does not 'undermine the department's reputation for integrity and accuracy'.

Opposition politicians seized on the report, saying it raised fundamental questions about the Chancellor's entire social security strategy. Senior Tories warned that, based on figures in the report, the amount of taxpayers' cash wrongly paid out since the tax credits system began in 1999 may already total £2bn.

Brown knows he would face a major political problem if he tried to claw back this money from poor families.

Shadow Work and Pensions Secretary David Willetts said: 'This humiliating evidence of Gordon Brown's failure shows his policy of introducing tax credits has not worked. Billions of pounds are being wasted in overpayments.'

It is a major problem for the Chancellor, who fought a bitter battle with Tony Blair to ensure the policy was implemented. He will also have to explain to Cabinet colleagues why he is aggressively trimming their budgets when his pet scheme is such a leaky bucket.

Brown's system is very complex. In essence, four years ago benefits were switched from being paid by the former Social Security department to being paid by the Inland Revenue in the form of a reduction in tax, or tax 'credit', through wage packets.

It was supposed to save money, make sure the poorest workers benefited and remove the stigma of having to pick up payments. But, according to the National Audit Office, it is riddled with problems and the Inland Revenue is not equipped to check up on claimants.

Overpayments are estimated to have been running at up to £710m a year since 1999.

In addition, when the new system was introduced in April, computer problems meant hundreds of thousands of families did not receive their payments, leaving many unable to meet basic bills.

The Tory chairman of the Commons Public Accounts Committee, Edward Leigh, declared last night that the Revenue's credibility had been badly damaged.

He said: 'This terrible waste of money is one side of the coin. The other is the disastrous introduction of the new tax credits system earlier this year, which has caused unnecessary suffering to a large number of genuine claimants.'

But the Inland Revenue claimed that error rates for the first full year of WFTC were better than the Family Credit it replaced. A spokesman said: 'New tax credits are reaching 5.9m families - 98% of those expected to receive them in the whole of the first year. That is a massive achievement.'