Labour’s tax credit system was wide open to fraud, says IDS

LABOUR’S tax credit system left behind a ‘sorry story of dependency, wasted taxpayers’ money and fraud’, Iain Duncan Smith said yesterday as the row over plans to cap payments intensified.

The Work and Pensions Secretary launched an outspoken attack on the complex tax credit system devised by Gordon Brown, saying it had been ‘wide open to abuse’, including by foreign criminals.

The TUC’s new general- secretary Frances O’Grady said Mr Duncan Smith’s comments marked the return of the ‘nasty party’, while Labour accused him of making a ‘ cheap political attack’ on a scheme relied on by almost six million families.

But Mr Duncan Smith insisted the tax credit scheme was ‘not fit for purpose’.

He accused Labour of deliberately extending the payments to more people in a bid to win votes – warning that the ballooning budget had helped bring the public finances to ‘breaking point’. He said: ‘In the years between 2003 and 2010, Labour spent a staggering £171 billion on tax credits, contributing to a 60 per cent rise in the welfare bill.

‘Far too much of that money was wasted, with fraud and error under Labour costing over £10 billion. Even for those in genuine need of support, tax credits were not fit for purpose.

‘The system was haemorrhaging money while at the same time trapping people in a system where those trying hard to increase the amount of hours they worked weren’t necessarily better off.’

Ministers admitted they did not know how many foreigners were claiming tax credits.

Treasury minister David Gauke recently said ‘nationality is not a condition of entitlement’ and was therefore not recorded.

The Coalition has disclosed that tax credits are paid to almost 6,000 children living abroad. But it does not know how much taxpayers’ money is being paid to foreign-based families, who are entitled to the British handouts under European law.

George Osborne last month announced plans to cap increases in tax credits to just 1 per cent, in line with restrictions on other working age benefits. Ministers argue that the cap is fair, given the modest increases in wages in recent years.

But Labour has accused ministers of imposing a ‘strivers’ tax’ which will hit millions of low-paid workers, as well as the unemployed.

Tax credits have long been seen as a major source of fraud and error. Critics claim it would be much cheaper to tax people less in the first place rather than working out complex ways to hand them back part of the money.

Payments are based on estimates of income for the coming year, and after 2008 HMRC did not attempt to reclaim overpayments of less than £25,000.

That is set to be reduced to £5,000 under the Coalition, alongside moves to require proof of payments from those claiming for childcare.