The audit unearthed a “large increase” in the amount of tax liabilities that HM Revenue and Customs decided not to pursue over the last two years.
Around £503m of the write-offs in the last year were for corporate tax, while the department also gave up £1.9bn of VAT payments and £1.5bn in income tax.
HMRC overpaid between £2.08bn and £2.46bn to claimants as a result of error and fraud in 2011-12, while it underpaid between £170m and £290m, the NAO said.
And while the Revenue claimed to meet targets to reduce tax credit debt to £4bn and crack down on mistakes, the NAO said the department only did so by writing off £1.7bn of old debts and overstating its error detection rate.
It warned that ongoing work to overhaul the pay-as-you-earn system contributed to the jump in rebates.
“This year has seen a litany of tax errors and scandals come to light with mistakes made at the most senior level from the Permanent Secretary for Tax downwards,” said Labour’s Margaret Hodge, chair of the Commons public accounts committee. “The sheer scale of waste and mismanagement at HMRC never ceases to shock me.”
Overall tax revenue rose by £4.5bn or 0.96 per cent to £474.2bn, as the VAT hike in January 2011 offset a fall in corporation tax.
The audit concluded that HMRC should look again at the cost and benefits of its collection strategies, and set out clearly how it would handle structural changes, such as the introduction of a universal tax credit.