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The report said of the software, implemented in 2003, "Serious problems with the introduction of the computer systems used to support tax credits delayed the processing of claims and led to incorrect payments being made."
The report added that, although the department considers many of the original problems with the system resolved, "Software errors continue to result in incorrect payments, and some claims are still processed manually. [The department] also considers the system to be fragile, which makes it difficult to develop further."
The problems led to HMRC demanding £71.25m compensation from supplier EDS. But the department is having problems collecting this money, because £26.5m of the full sum is contingent on EDS winning new business with the government. The company has been less successful in winning government contracts than the department expected, meaning the flow of payments has been slow.
Edward Leigh, PAC chair, said, "It was always a very bad idea for the government to have to commission new work from the contractor EDS in order to recover compensation for the poorly performing tax credits computer system. If the full amount of the settlement, £71.25m, is not paid over by the end of 2008, then HMRC must be prepared to return to the courts."
HMRC has paid £65bn to tax credits claimants since the scheme was introduced in 2003. The department is losing £1bn a year in fraud and error, and overpaid tax credits by £6bn in three years. £2.3bn of this has been written off or is unlikely to be collected.
Tax credits suffer from the highest rates of error and fraud in central government, but HMRC has no targets for reducing it.