The Government handed out over £100bn in loans and grants to businesses to help keep companies afloat as lockdowns affected their operations.

But in addition to an estimated £4.9bn loss to fraud and error relating to the £79bn of business loans given out in the first year of the pandemic, the Government now says it has lost £1bn for the same reason in regard to £21.8bn of business grant funding handed out via local councils.

However, the Institute of Chartered Accountants in England and Wales has warned this figure is likely to be a “significant underestimate” as almost half of the business grant payments are yet to be examined.

Concerns have been raised about criminals setting up fake companies to claim Covid support.

In a new report on the issue, MPs on the Public Accounts Committee said that while important support had been provided to businesses during Covid, “billions of pounds of taxpayers’ money will nonetheless be lost to fraud and error as a result of the Department for Business, Energy & Industrial Strategy’s approach to its Covid-19 business support schemes”.

Dame Meg Hillier MP, PAC chair, said: “BEIS says it saw this risk coming but it’s really not clear where Government was looking when it set up its initial Covid response. It offered an open goal to fraudsters and embezzlers and they have cashed in, adding billions and billions to taxpayer woes.

"These lessons should have been learned from the banking crisis a decade ago, and could have been prepared in the Government’s pandemic exercises. These mistakes must be written out of future crisis responses, now, and Government would do well to apply the learnings to the mounting, interrelated crises it now faces in climate change, energy supply and the cost-of-living.”

The PAC report said: “Some of its eye-watering losses only represent the department’s best estimates so far, so the actual amount of taxpayer’s money that will be lost could be even higher.

“The department will not know the true extent of total fraud and error within its Covid-19 business support schemes for some time as its assessments gradually catch up with payments made. We are concerned that identifying fraud and error so late will hinder recovery efforts as the money will have been spent and the trails will have long ago gone cold.

“We are unconvinced that the department’s current plans for recovering money claimed fraudulently will act as a sufficient deterrent to those considering committing fraud.”

The PAC report does highlight that the current £4.9bn loss estimated as a result of fraud and error for Covid ‘Bounce Backs’ loans may yet be downgraded to £3.3bn.

It said: “This figure represents the central estimate in a range between £3.6 billion (8.15%) and nearly £6.3 billion (14.15%), and relates only to the £46 billion of loans guaranteed by the Bounce Back Loans Scheme.

“The department is continuing to refine its estimates and considers that a more realistic fraud figure may be 7.5%; however, this is based on information that only became available in May 2021 and is not yet assessed by the department.”

But the PAC also said that while BEIS had been aware of heightened fraud risks from the Covid schemes, it believed the department “did not sufficiently identify or reflect the potential risks from organised economic crime”.

The committee highlighted that the number of new companies registered in 2020/21 rose by more than 20 per cent compared to any of the previous five years and said the emergence of 170,000 new companies at the start of a national lockdown “would certainly appear to be a warning sign warranting closer scrutiny”.

Lord Agnew, former Minister of State with counter-fraud responsibility, noted in his January resignation address to the House of Lords that “schoolboy errors” were made, including allowing more than 1,000 companies that weren’t trading when the pandemic struck to receive support under the Bounce Back Loans scheme.

A Government spokesperson said: “We’re continuing to crack down on Covid support scheme fraud and will not tolerate those who seek to defraud consumers and taxpayers.

“These schemes were implemented at unprecedented speed to protect millions of jobs and businesses. If the government didn’t move quickly, more businesses would have failed and many more jobs lost.”

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'Eye-watering' estimated Covid scheme losses to fraud and error at £6bn - and may be more