HMRC is manually wading through a backlog of over 16 million pay as you earn tax accounts, after continued delays to the launch of a centralised PAYE system, which will replace 1980s software.

The backlog has mushroomed from a government target of an already staggering 10.5 million cases requireing manual intervention at the end of March 2008.

The new Modernising PAYE Processes for Customers system, also known as the National Insurance Recording system, aims to replace the increasingly ineffective legacy system.

But last July it emerged that the launch had been delayed because HMRC decided the system did not have enough capacity. It could not effectively process information on people with multiple jobs, or those who regularly changed jobs. The rollout will now commence this spring.

HMRC had “significantly underestimated the volume of processing required”, the Committee of Public Accounts, the powerful group of MPs that scrutinises government spending, said in a new report.

As a result of the planning errors, by March last year sixteen million cases needed to be manually checked, the committee said.

In 2007 to 2008, HMRC collected £127 billion in income tax and £98 billion in national insurance through the systems, but a backlog of case queries built up as the existing systems do not offer a single view of individuals working for multiple employers.

The committee urged HMRC to develop a proper strategy to reduce the number of cases in the queue, and to ensure that the transfer of information to the new system did not in itself significantly worsen the situation.

“A strategy to eliminate this backlog should be established and implemented with all speed,” Edward Leigh, chairman of the committee, said upon publication of the ‘Tax Credits and Income Tax’ report. The backlog would otherwise be “set to worsen”, he said.

The committee warned that delays to resolving these cases would lead to further complications with taxpayers “unaware of an outstanding query against their tax record, which may give rise to an additional demand for tax or a refund”.

But the committee also supported the decision to delay the rollout, until the systems could properly cope.

HMRC is separately struggling to recover billions pounds of overpaid tax credits, after well-documented failures with its IT system, the committee said.

Problems with the tax credit system, built by EDS which in January paid a £71 million settlement over the failed technology, contributed to HMRC being left with £3.6 billion in overpayments to recover, of which half it is “unlikely” to recover, the committee said. Policies on calculating and processing tax credits were also at fault, it said.

HMRC uses provisional data on claimants to set tax credit payments, but overpayments are detected when a final assessment is carried out on claimants’ actual circumstances at the end of the year and they are found to have merited a lower credit. At the time of developing the system, the report said, HMRC had “failed to appreciate the variety and frequency of changes in claimants’ circumstances that would occur in practice”.

Additionally, up to £1.5 billion was lost to fraud and error in 2006 to 2007. Last July, the Sunday Times reported that HMRC’s IT systems inserted “random errors” into taxpayers’ files and “routinely wiped out” their salaries, creating overpayments.

Edward Leigh MP, chairman of the committee, said the overpayments were “breathtaking” with the amount lost to fraud and error “just as worrying”. After the overpayments, he said, “it is distressing that many of the families that have to make repayments to the department, on average £770 for a single year, are highly vulnerable and struggling in the economic downturn.”