THE Government was forced to concede yesterday that it would not attempt to claw back millions of pounds of tax-credit overpayments until disputes with claimants had been resolved.

The £16 billion tax-credit scheme, devised by Gordon Brown to support low-income families, had sparked controversy after millions of claimants had to hand back some of the money they received.

However, Dawn Primarolo, the Paymaster-General, who is in charge of the system, said yesterday that overpaid cash would no longer be automatically reclaimed by Revenue & Customs in cases where the overpayment is disputed.

She told the House of Commons Treasury sub-committee that from the middle of next month each disputed case would be dealt with separately within four weeks. No money would be taken back until the disagreement had been resolved, she said.

The sub-committee said that it would hold an inquiry into the tax-credit debacle, after MPs said that the Revenue had let down millions of low- income families.

Michael Fallon, Conservative MP for Sevenoaks and deputy chairman of the sub-committee, said that the inquiry would “look at the payment of child and working tax credits . . . to see what suggestions we can give for improvements to the system”.

Ms Primarolo was put on the back foot in early exchanges with MPs, which focused on the 1.9 million families who received overpayments totalling £1.931 billion in 2003-04.

Lorley Burt, Liberal Democrats MP for Solihull, asked Ms Primarolo if she accepted the Financial Ombudsman’s verdict of “systematic maladministration in the collection of overpayments”.

Ms Primarolo appeared to not understand what the Ombudsman had meant, which drew this response from David Laws, the Liberal Democrats’ Shadow Work and Pensions Secretary: “It is astonishing that the Paymaster-General does not understand the comments and pitiable that she has not therefore attempted to find out what they did mean.”

Peter Viggers, Conservative MP for Gosport, asked if Ms Primarolo “recognised the depth of distress that the system has caused?” Ms Primarolo said in reply: “I have made it clear at every point for the individuals concerned it is not acceptable that they have not received the service that they should have done.”

The Paymaster-General was also questioned over the £475 million cost of running the system, which had been forecast to cost £300 million. The inquiry will begin early next year.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts