Her Majesty's Revenue and Customs failed in its duty to provide a proper computer system to work out how much Pay As You Earn taxpayers should be paying.
In reality HMRC was unable to process PAYE in anything like real time and has now run out of time to collect tax owed from before April 2007.
The Public Accounts Committee said HMRC had failed to deliver an acceptable level of service. It knew in late 2009 that as many as seven million people had either overpaid or underpaid their tax bills – but did nothing about it until September 2010.
In January 2010 it began issuing 25 million tax codes for 2010-2011 without finding out why "the number of coding notices was massively in excess of its forecast".
The committee of MPs said the Rev had failed to understand the impact of dirty data. The PAC said it wanted to see evidence by the end of 2011 that this systemic failure had been rectified.
The MPs also said the Revenue should properly account for the cost of its failure.
MPs also questioned why HMRC re-employed its acting chief information officer Deepak Singh on a three-month contract on the equivalent of £600,000 a year. The committee noted: "This was after he had been unsuccessful in the competition for the permanent post." Singh was paid £150,000 to stay on for three months and he also received £19,200 in "outplacement services" to help him get another job.
MPs suggested the Revenue make more of an effort to replace senior staff, especially when their leaving dates are known well in advance.
No one knows how much tax has been lost as a result of the problems – estimates suggest £1.4bn had been underpaid and £3.0bn had been overpaid and will need to be refunded.
About 15 million people were given wrong tax claims even though implementation of the system was delayed twice.
There's more on HMRC's PAYE failure here. ®