The Public Accounts Committee report said that Revenue & Customs tried to recover an estimated 2.2bn in 2004/05.
The NDNA said that paying tax credits directly to providers would ensure that parents were receiving the correct entitlement, reduce fraudulent claims and help to prevent a build-up of bad debts for nurseries.
Purnima Tanuku, NDNA chief executive, said, 'Tax credits are an important way of helping families to access high-quality childcare, but the current system is both bewildering and open to fraud.'
Karen Walker, director of the Children's Place, a chain of eight nurseries in Yorkshire, told Nursery World that the levels of debt were highest in the company's Neighbourhood Nurseries, where more parents are tax credit claimants.
Over the past year, by the second week of the month the group's Neighbourhood Nurseries typically had more than 20 per cent of fees outstanding, she said.
Ms Walker said the company has clamped down on late payments to stop parents' debts spiralling out of control and now insists on parents paying fees one month in advance.
Nevertheless, in the past year it had to resort to the small claims court on at least ten occasions to recoup fees, often without a full settlement.
Ms Walker said, 'The system is desperately unfair on parents. They don't always know that they are going to get the credit. We're asking a lot of people who are going back into work. Many are just struggling, and then they suddenly discover that they have to pay back a huge chunk.
'You assume that the Inland Revenue is going to get it right. But two or three months down the line you have parents saying, "I thought we could afford it but we can't".'
She said that the Government should consider a 'phased-in' approach, with the money being paid directly to the provider at least initially, to give some leeway to parents and and stability to nurseries.
Child Poverty Action Group chief executive Kate Green said that the system needed to be 'simpler and less confusing', but that more should be done to increase the take-up of tax credits.
