The Inland Revenue knew for three years of a problem with its computer system which led to the £50m overpayment of tax rebates, but failed to act on the knowledge.
A Revenue spokeswoman told vnunet.com that it became aware of the fault in 1999, but carried on without fixing the system "because we did not want to provide a piecemeal fix".
The National Insurance Recording System system was not capable of recognising amended tax returns as being updated records, and treated them as separate returns.
Rebates may have mistakenly been given to up to one million of the 10 million people who contracted out of the State Earnings Pension System. Some predictions put the overpayment as high as £50m.
The problem arose because the Revenue forgot to include the need to recognise amended returns in its project specification. "The system acted correctly," said the Revenue spokeswoman.
By law, the Revenue is required to recover all monies from overpayments. But much of the cash received by pension firms will have been invested in the stock market.
The value of these investments has collapsed as markets have headed south, but pension firms are still required to pay back the full amount.
"Some of our members were aware of the problem and had raised the issue directly with the Inland Revenue," a spokeswoman for the Association of British Insurers told vnunet.com.
"We firmly believe that the responsibilities for the error lie with the Revenue. Any reparations should in no way impact on the customer."
A Revenue spokeswoman said that compensation is being considered. "We are very sorry that this happened. We are looking into means of compensation," she said.
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