The Tories urged the government to take action on the “totally unacceptable scandal” of error and fraud in the tax credits system.

George Osborne, the shadow chancellor said that in 2005-06 the Inland Revenue overpaid £1.7bn to claimants and underpaid £549m.

“That’s well over £2bn in mistaken payments that bring hardship to many hundreds of thousands of families and cost the taxpayer dearly.”

Mr Osborne asked Alistair Darling: “Will you promise that the level of error and fraud will be reduced while you are chancellor?”

Mr Darling acknowledged that the errors were “unacceptable” and that the government would reduce them, but it would take time and insisted tax credits had helped 20m families.

However, there are also millions of families suffering because they over paid, many of them may have been forced into insolvency because of the mistake. These people will never be compensated for defaulting on mortgages and losing their homes due to the government mistake. Many others have ruined their credit rating and been left to take out bad credit  loans to handle their debts. The position for those who have been overpaid is equally bleak, where families are required to hand back overpayments received in innocence. This can also result in bad debt and loan defaults.

The Treasury is also being pressured to end a rule that makes Britain a “tax haven”. The non-domicile loophole lets wealthy UK residents avoid paying tax on money earned abroad. This is unfair to residents who are forced to pay for services that are used by the growing number of billionaires living in the UK but running international businesses located on foreign soil.

Jane Kennedy, the financial secretary to the Treasury, defended the loophole position by saying: “Resident non-domiciles remain a relatively small group who are liable to pay UK tax on their earnings here in the UK and indeed the exchequer benefits to the tune of £3bn.”