In a report entitled Money with Your Name on It?, the Citizen's Advice Bureau (CAB) said some families are being threatened with repossession or eviction from their homes because recovery of overpaid tax credits had left them with incomes as low as 55 a week plus child benefit.
The CAB, which examined 150,000 tax credit problems handled by its offices, said it had to organise emergency food parcels for some destitute families.
'Tax credits offer substantial extra cash to low-income families, but poor administration and system failure have plunged many below the breadline and into mounting debt,' the CAB report stated.
Nick King, owner of the Dresden day nursery and co-chair of the North Staffordshire private nurseries network, said chaos in the tax credit system had affected both staff and parents of children at the nursery.
He said, 'We had two members of staff who were told they owed over 2,000 each. They don't just take back a bit a week; they stop their payments until the money is repaid. As a result, the staff are finding great difficulty in meeting their household bills.'
Mr King said one parent had repeatedly contacted the Tax Credit hotline to insist that she was being underpaid, but was told her payments were accurate. He said, 'As she needed her child to be at the nursery full-time she sold her house and bought a cheaper property with a smaller mortgage, only to be told there had been a mistake and she was owed money. She had sold her house unnecessarily and she was devastated.'
He added, 'They should be less heavy-handed. They penalised nurseries when they first introduced this tax credit system by exposing us all to fraud.
We had would-be customers cheating us out of money, and now this chaos.
What they are putting people through is inherently unfeeling and unfair.'
Jacqui Guernon, who runs three Happy Jays nurseries in North Yorkshire with her husband Tony, said one parent had been forced to withdraw her child from nursery as she struggled to find money to pay back the Inland Revenue.
A report from the parliamentary ombudsman revealed that a third of all tax credit awards - 1.9 million out of 5.7 million in total - had been overpaid in 2003/2004. Around 630,000 were overpaid 1,000 or more, while in 40,000 cases the overpayment was more than 5,000.
Meanwhile, a further 700,000 families had been underpaid.
The ombudsman, Ann Abraham, said, 'Many families report having to borrow money from family and friends to support their children, using up all their life savings or running up credit card debts in order to pay for childcare costs, buy food and get to work.'
She recommended that overpayments resulting from 'official error' in the first two years of the new system should be written off.
The CAB said there should be no automatic recovery of overpayments without a review and 'people should be notified and given a chance to challenge the decision or agree an approach to repayment'.
Kate Green, chief executive of the Child Poverty Action Group, said the two reports were 'deeply concerning', especially the revelations that half the instances of overpayment affected the poorest families. 'Tax credits can and should be helping those from low income households most. The Government must focus on dealing with this problem as a matter of urgency,' she added.
