|PIC1|The tax credits system, dogged by problems since its introduction five years ago, still pays out one billion pounds per year in wrong and fraudulent claims, a report by MPs said on Tuesday.

Attempts by HM Revenue & Customs (HMRC) to bring the system under "any measure of control" had "so far not been crowned with conspicuous success", the Committee of Public Accounts said.

It found that 6 billion pounds had been overpaid in tax credits in the first three years of the flagship scheme, of which around 700 million pounds had been written off and 1.6 billion pounds was unlikely to be recouped.

Just 2 billion pounds had been recovered by March last year.

Some 65 billion pounds has been paid out in tax credits since their introduction in 2003, but high levels of error and fraud, and harsh procedures for clawing back overpayments have led to fierce criticism.

"About two million families a year have been placed in debt to the government in this way since the scheme was launched," said Edward Leigh MP, chairman of the committee.

"Some regret ever having become involved. Certainly the vulnerable ones face a future of trying to repay the money they owe, with all the hardship that involves."

Tax credits - child tax credit and working tax credit - were designed to give financial support to those in need.

Awards are made on an annual basis and payments are initially made on provisional data, meaning that the final value of the award can change after payment has been made.

But, despite administrative costs rising to 587 million pounds in 2006/07, from 406 million pounds three years earlier, the report said the "situation is as serious as ever".

Many claimants continue to struggle to understand the system and why it gives rise to overpayments, and tax credits continue to suffer from the highest rate of error and fraud in central government.

Incorrect payments totalled an estimated 1.04 to 1.3 billion pounds in 2004/05, and HMRC still has no targets in place to address the problem.

Danny Alexander, the Liberal Democrat work and pensions secretary, urged the Treasury to "finally accept that Gordon Brown's brainchild is failing families".

"The tax credit system is overly complex and a mystery to all but the special advisers in the Treasury," he said.

"The government must scrap payments that fluctuate many times in one year and finally deliver the financial stability hard-working families need for peace of mind."

Philip Hammond, Conservative chief secretary to the Treasury, said the report was "another appalling indictment of the administrative incompetence at the heart of Gordon Brown's tax credit system".

"Families across the country will be angry that so little has been done to improve a system that has lost billions of pounds of their money.

"As always, the victims of Gordon Brown's economic incompetence are hard-pressed taxpayers."

The report also criticised the government for having to commission new work from computer firm EDS for it to recover compensation for the "poorly performing" credits computer system.

EDS had "stumped up very little" of the 26.5 million pounds to be paid under this arrangement, it said.

If the full 71.25 million pound compensation settlement was not paid by the end of this year, it said HMRC "must be prepared to return to the courts".