£156m IT overhaul to solve problem at HMRC is still four years from completion

The number of taxpayers incorrectly taxed because of the way the HM Revenue & Customs (HMRC) computers work is five times as high as previously estimated, according to the National Audit Office.

The problems arose from a failure to align computerised tax records with individuals rather than jobs.

An NAO report (PDF) said the structuring of records round employers instead of individuals resulted in "potentially" incorrect tax bills for five million people a year - four million more than were previously believed affected.

And tax losses of £880m a year have been revealed in the report, which also disclosed £340m overpayments of tax a year.

The NAO report, Financial Reporting and Financial Management – General Report of the Comptroller and Auditor General 2007, said the difficulties are compounded by inconsistent working practices, with staff failing to follow procedures.

The tax problem is greatest where individuals have more than one job or change jobs on a regular basis.

HMRC is engaged in a five-year IT change programme designed to secure efficiency savings equivalent to 3,000 full-time staff, which includes an element intended to transform PAYE processes by providing a complete view of an individual's tax affairs through the creation of a single customer record - but it will take four more years to complete.

The £156m cost of the new system is dwarfed by the tax losses.

A year ago it was estimated one million people in the year to April 2007 were incorrectly taxed.