MPs have slated the Inland Revenue's "frustratingly arcane" tax credits system and say it may have been "fatally undermined by its intrinsic complexity".
A report by the parliamentary Public Accounts Committee (PAC) says the current system has failed to cut fraud as promised, and routinely overpays hundreds of thousands of genuine claimants.
The PAC is also doubtful that the Revenue has the ability to get the system in order to overcome the problems.
The government introduced the current tax credits system in April 2003, as part of its move to replace Working Families and Disabled Person's tax credits.
The replacement system, designed by EDS, was supposed to be simpler and be able to cut fraud, while putting right bad administration.
But the new system failed to stop around £100m in overpayments in 2003, and the PAC said there was no evidence that fraud and error rates have been reduced since its introduction.
The PAC also pointed out that in 2003 the department found that a database cleansing system had wrongly deleted the tax records for one million people, leading to some people not receiving repayments and some not paying what they owed.
Edward Leigh MP, chairman of PAC, said, “There is a general lesson here: that an ambitious scheme might be fatally undermined by its intrinsic complexity.”
The Inland Revenue recently merged with the Customs & Excise department to create HM Revenue & Customs. EDS’s management of the tax credits system was terminated and Capgemini was brought in as a replacement.