The disastrous introduction of the tax credit systems was a result of an unrealistic timetable and lack of contingency planning, said Public Accounts Committee chairman Edward Leigh MP.
In August 2003, the Department of Work and Pensions estimated the level of overpayments under the old tax credit schemes were between 10% and 14% by value, or £510m to £710m over the full year.
The scheme and associated IT systems caused problems for several hundred thousand claimants who were not paid on time, and for employers who made some payments, the PAC said.
The committee found that the department should have been more cautious and realistic in fixing the timetable and assessing the resources needed for setting up and testing New Tax Credit systems.
The department said that it expected an immediate halving of error rates with the introduction of New Tax Credits. It should cross-check information with other departments and set targets for future performance, Leigh said.
"The problems that arose when the Inland Revenue introduced the New Tax Credits scheme are well known," Leigh said.
"It was nothing short of disastrous, with hundreds of thousands of claimants not paid on time, inevitable hardship for some, inconvenience to employers and disruption to other parts of the Revenue’s business."