[The proposals] extend welfare dependency and undermine independent taxation

Anne Redston of Ernst & Young

Claimants of the tax credit who experience a rise in income could also be forced to pay back money to the government, which could act as a disincentive to work.

Tax credits are a central plank of Labour's welfare policy.

They are aimed at making work pay and tackling poverty, but critics claim that they are too complicated and bureaucratic - and could have the opposite effect.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants (ACCA) said: "The way they are doing this is horrendously complicated and grossly unfair - they shouldn't be socially engineering in this way."

New proposals

The proposals are outlined in a document called "New Tax Credits - Supporting Families, Making Work Pay and Tackling Poverty".

They follow the Chancellor's announcement in his 2000 budget to create a new integrated child tax credit and a new employment tax credit for other low earners.

The integrated children's tax credit is aimed at replacing the Children's Tax Credit, Working Families Tax Credit, Disabled Persons Tax Credit and the child entitlements of Income Support and income-based Jobseeker's allowance in 2003.

Entitlement for the new credit will be calculated on an annual basis, and based on the previous year's income, instead of the current 26 week cycle.

Quick response

Although the paper says that it will include "the facility" to respond immediately if people lose their jobs or experience a significant fall in income, people could risk paying money back to the government if they experience a significant rise.

The consultation document states: "New tax credits will have to respond to rises in income, if they respond to falls".

It adds that "families should be asked to report significant rises in annual income, while they remain in work, if they wish to avoid running up an overpayment".

Anne Redston, tax partner at Ernst & Young, said that the proposals were "a complex game, plagued by problems of definition. They extend welfare dependency and undermine independent taxation."

Struggling in the 'real world'

Critics also believe that the system will struggle to cope in the "real world" where people move in and out of employment, or use an agency to take on a succession of different jobs.

Experts said that the new system may fail completely when people are paid through their employer's tax system, as well as earnings from self-employment.

"There will be lots more bureaucracy for employers and people are likely to have problems finding their way through the minefield that are tax credits" said Mr Roy-Chowdhury of ACCA.

The proposals are now up for consultation before the introduction of legislation in the Autumn.