The government can not recover overpayments of social security benefits through the courts where the claimant is not at fault, the country's top court has ruled.
An appeal by the Department for Work and Pensions (DWP) was rejected by the Supreme Court meaning the state is liable for the costs of any mistakes in benefit calculations it makes.
The decision applies to benefits administered by the DWP (including incapacity benefit, Employment and Support Allowance and Disability Living Allowance) and child benefit and guardian's allowance.
It does not cover housing benefit or tax credits cases.
The result is likely to come as a blow to government plans to slash welfare spending.
Figures from the DWP state that at least £1.1bn a year is paid out as a consequence of its own errors.
Between March 2006 and February 2007 the Government wrote to over 65,000 claimants telling them it could sue them in the County Court if they did not pay back overpayments which were caused by the DWP's own mistakes.
The letters acknowledged that the money was paid due to the department's own errors and were not recoverable under social security law.
In one example, a claimant was overpaid over £50,000 in incapacity benefit because of a DWP error in calculating the national insurance contribution record.
In fact there was no loss to the public purse; had the claimant not been paid incapacity benefit he would have been entitled to the same amount of income support instead.
Following this development, charity Child Poverty Action Group brought a test case to the High Court contesting the government's right to do so.
The High Court ruled in favour of the DWP but this was then reversed by the Court of Appeal, a judgment unsuccessfully contested by the Secretary of State in the Supreme Court.
The charity claims the ruling affects not just many thousands of claimants but goes to the heart of the Government's welfare reform agenda.
Commenting on the ruling, Alison Garnham, chief executive of Child Poverty Action Group, said it was an important decision that will protect many vulnerable people from debts created by the Government's own errors.
"Even though the letters claimants were sent acknowledged it was the government's own errors and the debt was unrecoverable under its own social security law, explicit threats of court action were still made," she continued.
"We hope the department will regret the anguish caused to many of the people who received the letters and will seek to improve its own administration to avoid overpayment problems. The people we spoke to did not know they had been paid too much.
"They were not fraudulent claimants trying to get extra money. Rather, they were the innocent victims of DWP error and the complexity of the benefit system.
"It is a very great concern that if the government's plans to end legal aid for welfare benefits proceed, claimants will not be able to get advice on these complex issues in future and may face injustices as a consequence," she added.
