According to the National Audit Office, error and fraud in the tax credit system was 8% in the year 2010/11, well clear of the 5% target.
Error and fraud losses were almost £2.3bn, around £850m higher than if the Revenue had achieved its targets.
The spending watchdog concluded that HMRC had made “improvements” but has not yet received any “sustainable reduction” in the level of losses and is not yet achieving value for money.
Amyas Morse, head of the NAO, said, "The tax credit system is complicated, and HMRC will have to overcome significant challenges if it is going to achieve value for money. HMRC deserves credit for demonstrating innovation, but it has further to go to achieve sustainable reductions in tax credits error and fraud.
“To tackle error and fraud effectively, there needs to be an improved understanding of risks and better use of information."
HMRC introduced a new system in 2009 to tackle error and fraud after setting the. The Revenue increased the number of checks on claims, targeting claims at greatest risk of containing fraud and error. The NAO says this approach is “innovative” but that HMRC “overestimated the impact of its activities.”
The department had estimated it had prevented £1.4bn of error and fraud in 2010-11, but has now revised this to under £500m.
The NAO concluded that HMRC has “not yet developed an effective response to stop error and fraud recurring after it has corrected a claim” and that it has also been less effective in tackling some specific types of risk.
The report did add that although HMRC has strengthened its approach over the last year, it was too early to conclude how effective this had been because it could not be assessed until the next set of error and fraud data is available this summer.