HM Revenue and Customs has seven million new unresolved tax cases to process from the last year, directly as a result of a delayed system overhaul.

This is according to the government's National Audit Office, which found that a total of 18 million pay as you earn and national insurance cases now await action, having been “potentially overpaid or underpaid”.

In total, CIO 100 listed HMRC expects to pay out a net sum of £1.6 billion as a result of errors, even after the collection of unpaid tax.

The seven million new cases come from a two year delay to introducing a new National Insurance and PAYE Service. It replaces 12 regional databases holding Income Tax records as well as a National Insurance Recording System.

The systems, finally introduced this April, did allow HMRC for the first time to combine its records of individuals’ national insurance contributions with their income tax paid through PAYE.

The delay was due to a “difficult” implementation, as HMRC needed more time on software development and testing, the NAO noted.

HMRC halt all IT investments

The delay also led to £111 million extra costs, mainly through system changes including the need to meet revised security guidelines, as well as the loss of £55 million planned efficiency savings during 2008 and 2009.

The project has cost £389 million, with expected savings of around £532 million over five years.

Amyas Morse, head of the NAO, said that HMRC was being hampered by “pressure on the department to streamline its processes”, as well as the “effectiveness” of its IT. Additionally, the effect of the recession was to increase the value of the tax debt to be recovered.

HMRC was attempting to collect unpaid tax by running campaigns, but needs to improve data and measurements to ensure these are working.

Morse said: “Those systems need to be developed so they improve the Department’s ability to monitor and assess the targeting and performance of its debt collection campaigns and to design future interventions in the areas of greatest risk.”

A large number of amended tax codes created by the system were also incorrect, and the NAO said that HMRC “only fully appreciated the extent of the data inaccuracies once the problem with the annual coding emerged in January”.

It was forced to manually review over nine million records to ensure the wrong tax notices were not sent out. Further changes will be made to the software by 2011.

An HMRC spokesman acknowledged that there was “a lot of work to do to deliver the quality of service to which we are committed”.

“Just like every government department we are going to have to do more with less and today’s report will help us to focus on those areas of our business that need to improve,” he said.