HM Revenue & Customs (HMRC) has refuted reports that problems in IT systems meant £2.8 billion was being lost in overpayments of tax credits.

But the government has come under fire from MPs for its “complete inability” to handle IT systems.

Newspaper the Sunday Times reported that the HMRC IT systems inserted “random errors” into taxpayers’ files and “routinely wiped out” their salaries, contributing to tax credit overpayments of up to £2.8 billion.

Tax offices have since demanded in numerous cases that the overpayments be returned, sometimes threatening court action, after the IT problems and office “disarray”, the newspaper reported. This evidence was uncovered as victims obtained their own case files under data protection laws, the paper said.

Problems with the technology, alongside government offices in “disarray”, have been blamed for the overpayments, the newspaper reported. But multiple copies of the same file meant that in one case, a claimant was sent 10 letters in one day, was then assured there were no mistakes, and was later threatened with court action.

Another claimant, according to the newspaper, was told: “The computer zeroed your wife’s salary. It’s a common fault.”

A spokesperson at HMRC refuted the reports. “We have not lost £2.8 billion, the IT system is working fine and has been for years,” he said. Some £1 billion would been written off over the lifetimes of the credits because much was unrecoverable, he said, and HMRC had set a provision of a further £1.8 billion for the coming several years. This was a “natural” part of the process and not related to IT systems, he said, and was worsened by claimants who did not declare changed living circumstances that removed their rights to the credits.

An anonymous former tax official was quoted in the Sunday Times as saying that tax credit files were input incorrectly into systems, and were unable to be changed later. Staff then added new versions of the files with corrected information, but could not remove the files, thus creating the problem, the former official said.

The HMRC systems are run by Capgemini under the recently renegotiated multibillion pound Aspire contract, which aims to overhaul technology and reduce running costs. Capgemini could not provide comment at the time of going to press.

HMRC is no stranger to controversy over its IT systems. In February, MPs urged the government to consider suing former supplier EDS following a settlement over the original problems with the system. But the spokesperson today said the well-documented problems at the start of the tax credit system had been solved, he said, and the system was now working.

In a statement sent to CIO sister title Computerworld UK, John Barrett, Liberal Democrat work and pensions spokesperson, said the “entire tax credits system” was called into question by this “major systems error”.

"This latest fiasco underlines the government's complete inability to manage and deliver complex IT systems and as usual, it is the public who bear the brunt.

"For innocent families to have been bullied by the Tax Credit Office in this way because of computer failings is utterly outrageous.”

Alison Myers-Ward at Tax Credit Casualties, an organisation that helped people make data protection requests and discover the errors, was quoted by the Sunday Times as saying the pursuit of repayments by tax offices had "destroyed lives". The HMRC spokesperson said it was a “free country” for the lobby group to make its voice heard, but added that the lobby group “wants us to write off billions of pounds worth of taxpayer money”.

He refused to comment on the information revealed under the Data Protection Act, saying HMRC did not discuss “individual cases” with the press.

HMRC's IT has featured heavily in the headlines in recent times. Earlier this month, it postponed the rollout of a £140 million pay as you earn processing system because it was not ready. The system was part of an ongoing transformation programme, under which MPs questioned the realism of the HMRC aims of saving £11.5 billion by 2011.

Separately, it also emerged that a hardware fault had been to blame for up to 15,000 people being unable to file their online tax returns on deadline day in January.

Data handling at HMRC has also come under scrutiny after it lost 25 million child benefit records on two computer discs last year.

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