Organised fraudsters tried to steal more than half a billion pounds from the government’s tax credit system in 2005/06, new figures show.HM Revenue & Customs (HMRC) says that of the £540m it knows about, it lost £131m to fraud, up from an earlier estimate of £15m.

Some 53,000 fraudulent claims were only discovered after payment - although HMRC stopped 91,000 other attempts.

Tax credits are designed to assist low-paid workers and families.

Paid to families accounting for more than 20 million people, they were introduced by the government in 2003 and have been a core policy for Chancellor Gordon Brown ever since.

But the system has been dogged both by fraud and also by overpayments to claimants, which amounted to £1.8bn in 2004/05.

Sustained assault

The fraud and error figures are contained in a report issued by HMRC to accompany a statement by Paymaster General Dawn Primarolo.

They demonstrate an upsurge in fraud - accompanied by urgent action by HMRC to try to tackle it.

A sample of cases in 2003/04 indicated that total fraud that year amounted to some £70m.

However, since then it has become clear that organised crime syndicates have mounted a sustained assault on the tax credit system, as BBC News revealed in October 2005.

In late 2005, according to a separate report from the National Audit Office, 62,000 attempts were made to defraud the system’s online portal - which did not require claimants to provide documentary evidence.

Of these, 33,000 were successful - at a cost of £55m.

This led to the closure of the portal in December 2005.

At the same time, an investigation was launched into the misuse of the identities of some 7,000 employees at the Department of Work and Pensions - as well as another 4,000 at Network Rail.

HMRC has now increased the number of prepayment checks it makes to 100,000 in 2005/06 - a fiftyfold increase in two years.

By 2007/08, it promises to expand its current data matching efforts - focused mainly on Child Benefit - to “a wide range of current and historical personal data held by HMRC and from third parties”.

On overpayments, the government has now changed the rules - meaning that overpayments need to be much bigger before HMRC claws back the money.

Earlier problems

The new reports include one analysing the performance of the system in its first year, 2003/04, revealing that fraud and claimant error cost the government an estimated £1.2 billion.

This amounted to around 10% of all tax credit payments - nearly three times an earlier official estimate of £460m included in a National Audit Office assessment in 2005.

There were 90,000 claimants who mistakenly failed to mention a partner, receiving overpayments totalling £305m.