Either fraud or mistakes by officials were responsible for the huge sum. And despite efforts by the taxman to reduce the amount handed out in error, the annual total was still £1.2billion over the last 12 months.
It means more than £23m a week is being given to people who have either deliberately lied or failed to inform HMRC about a change in their circumstances.
That amounts to nearly one pound in every £25 paid out in working and child tax credits in 2013/14, the most recent figures available – and a decade since the system was set up by Labour.
The revelations will increase calls for reform of the system, which critics say is wide open to abuse and ‘traps’ people in poverty.
Last night Dia Chakravarty, of the TaxPayers’ Alliance, said:
It is unacceptable that billions of taxpayers’ money is being wasted like this, particularly as we’re constantly told that any tightening of public finances will result in loss of front-line services. The benefit system needs an urgent overhaul so that it can really be a safety net for those who truly need it. Taxpayers simply cannot afford this scale of waste and it’s high time our politicians took the task of tackling it seriously.George Osborne is expected to target tax credits in his Budget in two weeks’ time as he seeks to find the first tranche of £12billion in welfare cuts.
Senior Tories think tax credits are often used by employers as an excuse for low pay, while supporters say they help the lowest paid and taking them away would amount to an attack on the working poor.
In 2004/5 fraud and error amounted to £1.17billion. It increased to £1.5billion the following year and remained at that level until 2008/9 when it topped £2billion.
In 2010 it peaked at £2.27billion and has since fallen to £1.5billion in 2012/13 and then £1.2billion in 2013/14.
HMRC analysis of the data suggests around 820,000 claims are wrong or fraudulent. More than 380,000 families benefited to the tune of £1,000 or more.
Mistakes and fraud often involve claimants not telling the taxman when their circumstances change – such as not declaring a partner or failing to record an income.
Last night HMRC was unable to state how much of the total lost in fraud and error it had recovered over the decade following the scheme’s launch.
Set up by Gordon Brown, the complex system involves two classes of benefit – working and child tax credit – which are worth a total of £30billion and paid to around 4.5 million families.
In 2008, when the former Labour leader was prime minister, he increased the ‘income disregard’ threshold – the level below which benefits are written off – by £2,500 to £25,000. However, the scheme has been attacked for giving companies an excuse to pay staff rock bottom wages.
A study by Citizens UK found that Tesco, Asda, Sainsbury’s and Morrisons alone account for almost £1billion a year in tax credit payments.
On Monday the Prime Minister vowed to end Britain’s ‘welfare merry-go-round’ and move to a ‘higher wage, lower tax, lower welfare society’.
At the same time Work and Pensions Secretary Iain Duncan Smith attacked firms which pay ‘poverty wages’. He said companies ‘should pay higher salaries’ rather than relying on the taxpayer to top up staff incomes, and accused Labour of cynically boosting tax credits before previous elections to ‘buy votes’.
He added: ‘What we want to see is companies taking a fuller share of paying people a reasonable and decent salary – that is an absolute fact.
Companies should pay higher salaries, which would mean less tax credits from us.’ In the past, Mr Duncan Smith has described the tax credit system as ‘not fit for purpose’.
A spokesman for HMRC said:
The level of error and fraud in the tax credit system is at its lowest level since tax credits were introduced in 2003, and around £1billion less than in 2011. New measures to tackle error and fraud together with a significant increase in the number of direct interventions have delivered real success against the minority who aim to cheat the system.