The UK Inland Revenue has accidentally deleted almost 1 million taxpayer records from the years 1997 to 2000 because of an error in the way it maintained its databases, a government report claims.

The error led to more than 360,000 taxpayers who can't be identified missing out on payments they are due, and a further 22,000 not paying taxes they owe, according to the report, from the House of Commons' Public Accounts Committee.

PAYE records destroyed

Inland Revenue, which is now part of HM Revenue and Customs, acknowledged last year that it had been deleting files accidentally from its income tax database, known as the PAYE (Pay As You Earn) system.

For ten years the PAYE database has had a housekeeping function that deletes records when they are over three years old, with the assumption that cases will have been closed by then. When the department developed a backlog of cases a few years ago, the housecleaning continued even for cases that had yet to be dealt with, a report said.

The Public Accounts Committee grilled the Inland Revenue about the problems at a hearing in January. Committee members were bemused that records had to be deleted so frequently, according to a transcript included with Thursday's report.

"Anybody who has seen an ad for the Oxford English dictionary, which is 20 volumes, or an ad for Encyclopedia Britannica, which is Lord knows how many more volumes, knows you can fit an awful lot of data on one CD," said Committee member Richard Bacon, the Conservative member of Parliament for South Norfolk.

Why, then, did Inland Revenue have to clean its databases so frequently? he asked.

David Varney, the executive chairman of HM Revenue and Customs, replied that storage was much more expensive when the system was first developed. The department has since extended the period for deleting cases to six years, he said, but Bacon was unconvinced.

A financial case odyssey

"I must say, you make it sound like HAL 9000 going off and doing its own thing completely independent of human hand," he said, referring to the rogue computer in the movie "2001: A Space Odyssey".

The department first discovered it had been wrongly deleting files in 2003 when it introduced a new system that could monitor the PAYE system, according to the report. It now stores the deleted cases in a backup file so it can restore them if it needs to.

Tax credit system taxed

The problems involve the Working Families and Disabled Person's Tax Credits system, which was replaced in April 2003 by an updated system called the Child Tax Credit and Working Tax Credits system. The new system is dogged by problems and may be too complex ever to implement properly, the report says.

In 2003-2004, tax credits were awarded to some 5.7 million UK families for a total value of £16 billion. As many as a third of the claimants were overpaid that year, according to the report. The most recent estimate, from 2003, puts the typical level of overpayment at between 10 per cent and 14 per cent, caused by a combination of fraud and error.

The report notes that HM Revenue and Customs has been negotiating with Electronic Data Systems (EDS), its previous IT services provider, for compensation over what it considers unsatisfactory system performance. EDS has not accepted the findings of an independent arbiter, according to the report, and the department is "considering its legal options."