SWINDON-FUNDED research has shown that new Government tax credits are costing payroll departments up to 10 per cent extra a year and further problems could be ahead.

The Economic and Social Research Council in North Star provided money for two academics from the University of Bath to investigate the changes in tax credits, which were introduced in April last year.

Now there are two credits available. In place of the old Working Families Tax Credit, there is now the Child Tax Credit and the Working Tax credit.

The Child Tax Credit is paid directly by the Inland Revenue to claimants, but the Working Tax Credit is processed by employers.

However, this is likely to change yet again in the autumn with the introduction of the Family Tax Credit meaning more headaches for employers having to learn a new system.

Colin Lawson and Michael Godwin from the University of Bath's department of economics and international development, carried out dozens of interviews to see how the change had affected companies.

While tax credits have been a major part of the Government's strategy to get more people into work, many business groups have criticised them because of the cost of implementing the schemes.

The research found that the annual cost ranged from £20 to £100 for each employee. Costs fell as the payroll size increased.

The report concluded: "It is regrettable that the opportunity was not taken to introduce direct payment of Working Tax Credit in 2003, at the same time that Child Tax Credit was switched from payment via the employer to direct payment.

"As it is, employers have been engaged in the thankless task of learning a new system which is likely to be modified again in the near future."

Eamonn McArdle, funding advisor at Business Link Berkshire and Wiltshire, said the tax credit system is a burden on small businesses.

"It's inherently unfair in one respect that any mistakes in the system are the problem of the employer," he said.

"It's important to check people's status, particularly as we are headed for another transitional period."

Mr McArdle said it is worth employers' while to regularly check with the Inland Revenue that those receiving tax credits are eligible for them.

He also said that BLBW often recommend that companies of more than about five staff should think about using an external payroll service, as administering tax credits is much harder under a manual system.