Tax credits are still open to "significant" fraud and error, a Whitehall spending watchdog warned today as it refused to sign off the accounts for the sixth year in a row.

Tax credits are still open to "significant" fraud and error, a Whitehall spending watchdog warned today as it refused to sign off the accounts for the sixth year in a row.

The National Audit Office (NAO) said up to £1.54 billion was wrongly paid out by HM Revenue and Customs (HMRC) in 2006/7 despite Government efforts to combat the problem.

NAO head Tim Burr said he could only issue a "qualified opinion" on the tax credit accounts because of the failure to stem the losses.

His annual report on HMRC also highlighted a failure to collect £135 million a year from around 420,000 pensioners and a backlog of 16.2 million taxpayer records waiting to be cleared.

Mr Burr also pointed to a "significant" deterioration last year in processing VAT returns - although he noted that HMRC was now back on target in that area.

"Levels of tax credits error and fraud are significant when compared with the expenditure on the scheme," he said.

"I have therefore qualified my opinion on the regularity of these payments. HMRC now has a target and has developed a strategy for reducing error and fraud.

"It will need to monitor how the measures it adopts are contributing to the achievement of the target and to respond effectively."

Treasury Financial Secretary Jane Kennedy said HMRC had "significantly accelerated" its programme for measuring fraud and error and had set a target to cut it to 5% of total entitlements by 2011 from the present 7.2 - 8.4% level identified by the NAO.

Edward Leigh, the Tory MP who chairs the Commons public accounts committee, said fraud levels remained "unacceptable" but welcomed the new target.

"According to latest estimates, the amount being lost to fraud and error is still running to unacceptable levels, with between £1.31 billion and £1.54 billion paid out to claimants in 2006-07 over and above their entitlement.

"In a welcome but long overdue move, HMRC has announced a target to reduce fraud and error in tax credits to under 5% by 2011. Our Committee has been pushing for such a target for some time."

The NAO report also pointed out that £4.3 billion in overpayments also remained to be recovered, with £1.8 billion of that "in doubt" and potentially needing to be written off.

Overpayments were anticipated as part of the system - to allow for claimant's changing circumstances within the tax year.

But the huge scale of the sums involved has led to intense criticism, particularly from campaigners representing poor families being forced to hand cash back to HMRC.

"Vulnerable families who have been overpaid, already struggling within the current economic climate, face long term repayments to the government through no fault of their own," Mr Leigh said.

The Liberal Democrats said the total "lost" through overpayments, fraud and error since tax credits were introduced in 2003 had now topped £13 billion.

Work and pensions spokesman Jenny Willott said: "The tax credits system is so complex that it is abused by fraudsters, misunderstood by claimants and mismanaged by officials.

"The amount lost through overpayments, fraud and error is now over £13 billion and likely to keep on rising if changes are not made.

"Not only are costs spiralling, but families are riding a financial rollercoaster when they are forced to pay for mistakes made by officials who can't understand the system themselves.

"Tax credits must be made simpler - we need to return to fixed awards which are easy to administer and ensure families aren't burdened with overpayments."

In a written statement to MPs, Ms Kennedy said six million families - including 10 million children - now benefited from tax credits.

They had played a "key role" in cutting child poverty and getting people into work, she said.

Errors favouring the claimant had been cut from 9.2% of all entitlement in 2003/4 to 7.6% in 2006/7, she said, and fraud from 0.6% to 0.2%.

HMRC would now give "targeted assistance" to ensure new claims were properly submitted with "vulnerable" claimants given extra guidance when renewing.