Speculation about Sir David Varney, former Managing Director of Shell UK Limited

With Labour all at sea and rumours of mutiny clouding round Captain Gordon Brown, is his old flagship, HMS Tax Credits, heading for the breaker’s yard? Word is that many in Whitehall now believe that this once-vaunted policy is unseaworthy – so much so that insiders expect it to be scuttled by the next government. (Meaning the Tories? “Possibly,” says one senior figure. “Or possibly by a Labour prime minister who is not Gordon Brown.”) Snippets emerging from insiders suggest tax credits were doomed to disaster from their launch five years ago.

They were the brainchild of Mr Brown when he was chancellor. He wanted to end the stigma associated with benefits and bring everyone into the tax system under his ever more powerful Treasury. Tax credits started just before the Inland Revenue was merged with Customs. Who looked after the merger? As former top official Sir Richard Mottram pointed out to MPs this month, the man responsible was Sir Gus O’Donnell, then top official at the Treasury and now cabinet secretary. I am told Sir Gus sounded out various private sector men about his merger plans. One said they would not work, others said they might – but they did not want to be quoted officially. Sir David Varney, who had worked for Shell and for O 2 , commended Sir Gus’s report – and became the first chairman of the new Revenue & Customs.

The trouble was that the tax credits scheme meant HMRC also had to absorb a great chunk of benefits payments from the Department of Work and Pensions. I am told that senior people at DWP (Sir Richard was the top official there then) offered to advise but were turned down.

With no experience of dealing with the poor, at the end of the year HMRC started demanding money back from vulnerable families who had been overpaid in tax credits. Often people had no way of paying and found it next to impossible to appeal. Unlike DWP, which does not try to reclaim money when it has been at fault, the HMRC is reluctant to admit to official mistakes. By March this year HMRC was looking to claw back £2.8bn from claimants but £1.8bn of that is “in doubt”, meaning it will probably have to be written off. No wonder the National Audit Office has just “qualified” HMRC’s accounts for the sixth year running because of error and fraud in tax credits.

As Sir Richard told the MPs, the merging of HMRC was a “massive task of organisation and culture . . . and it was being done in parallel with implementing, in the case of tax credits, something that was of, well, doubtful implementability”.

To add to the chaos, Sir David agreed a deal with the Treasury involving rigid plans for cutting 24,000 HMRC jobs – more than a quarter. (I am told one private sector adviser said this was not so much a strategic plan as a set of assertions.) Sir David then left with part of his contract still to run. (Was he hoping to go to the Lords? Was he expecting another job offer? Speculation continues.)

Meanwhile I learn that plans to transfer yet more benefit claimants from DWP on to HMRC’s tax credits have been shelved (for good, according to insiders). The real victims of this gargantuan Whitehall mess are millions of hard-up families.

Now a feisty pressure group called Tax Credit Casualties, representing more than 1,000 families, is demanding an amnesty on all HMRC overpayments. Any precedent for such a thing? Just as tax credits were being launched here, Australia declared an amnesty on the overpayment of welfare benefits. Why? Anger at bullying, incompetent authorities – and an election coming up. Just like here.

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