Tax credits: HMRC threatens new legal action against EDS

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HM Revenue and Customs [HMRC] says it will sue US-based services supplier EDS unless the supplier steps up compensation payments for failures in its IT support for tax credits, which led to tens of millions of pounds in incorrect payments to claimants.

The Revenue’s chairman Paul Gray says his officials have carefully archived “millions of relevant documents” in preparation for a court case he hopes will not happen.

The tension between the two sides comes after they signed a unique deal in November 2005 in which EDS agreed to compensate HMRC over tax credits by paying £71.25m with £26.5m of this contingent on EDS winning new UK government contracts.

By the end of 2006 EDS had paid less than £250,000 of the £26.5m – and at that rate it would have taken more than 100 years to pay off the full amount.

It was always a controversial agreement. After details were published in Computer Weekly Edward Leigh, chairman of the House of Commons' Public Accounts Committee, said of the agreement that it: "dictates that if the Department is to secure £26.5 million of this sum [£71.25m], EDS must win further work from the Government. This is an unwelcome arrangement which places the Government in an invidious position."

Last week MP Richard Bacon, a member of the Public Accounts Committee, questioned Paul Gray tenaciously on HMRC's agreement with EDS. Gray replied: “I have been discussing with our lawyers the process for bringing the matter back to the courts if the acceleration of payments during the course of next year does not meet my expectations. I hope that it will.”

Gray has expressed a “real concern” about the low level of payments and has been in touch with EDS’s global chairman Michael Jordan who is based at the company’s headquarters in Plano, Texas.

Gray told the committee, “What I can say is that the flow of further payments over the last few quarters has continued to be extremely small. It’s quite clear that over the last two years that EDS has been less successful in winning contracts for provision of public sector IT support in the UK than it was expected to be.

“Against that background we have recently been having a series of meetings with the management of EDS … I and my team have been making clear to EDS that the present level of payments cannot continue indefinitely. I am determined to ensure that we do obtain full amount of the settlement even if the flow of new business to EDS is not enough to generate the full payment to us.”

Last week HMRC agreed measures with EDS which Gray believes will accelerate the rate of payments from January 2008. Gray added: “However the proof of the pudding will be in the eating.”

When Richard Bacon asked Gray how much EDS has paid of the settlement Gray replied that the figures were confidential but he was able to give the figures to the committee in private. The committee did indeed go into private session.

There is no suggestion that EDS has breached the agreement with HM Revenue and Customs. The settlement of the £26.5m was always subject to how much government business it won.

EDS declined to comment.

Comment:

The £71.25m agreement between EDS and HMRC was always going to be trouble. The three big flaws for HMRC were that:

- Payment of £26.5m of the £71.25m was not guaranteed
- When the government announced the settlement in November 2005 it portrayed the deal as an unprecedented achievement by Whitehall's negotiators. It made no mention of the fact that £26.5m wasn't guaranteed.
- Government should not be placed in the difficult position of having to commission further work from a contractor to recover compensation for underperformance.

HMRC’s board is disappointed that EDS has paid back little of the £26.5m in compensation. But it has no legal redress against the supplier simply for this. HMRC’s only real complaint is that EDS has adhered to the agreement.

If you are unhappy with work carried out by a roofing firm and you agree to be paid compensation according to how much new UK business the roofer wins, you should not be surprised if you receive little when the company wins few big new contracts.

The most serious problem with the compensation deal between HMRC and EDS is the announcement of it in November 2005. Treasury minister Dawn Primarolo, then responsible for the affairs of HMRC, made a statement to the House of Commons that gave no hint that any of the settlement was contingent on EDS's winning further UK government business. Primarolo was only reading from her brief which was written by civil servants. But did that brief amount to a misleading of Parliament?

Primarolo said in 2005: "The aggregate settlement [between HMRC and EDS] is £71.25 million including an up-front payment and payments of additional amounts over time. Details of the settlement are commercially sensitive and therefore bound by a legal confidentiality agreement as is normal in agreements of this nature."

The government later marketed the amount of compensation as unprecedented.

This was a government statement about the £71.25m settlement:

“In considering the settlement offer, HMRC looked for precedents for settlements in software-related cases in the public sector and elsewhere. We could not find any situation in which an IT company had made a compensation payment to a UK government customer of a similar magnitude to that eventually obtained by HMRC from EDS.

“Against this background, and given the settlement avoided at least two years litigation, which would have been very costly both in money and senior management time, we believe the settlement of £71.25 million represents a very satisfactory outcome.”

It was not until Computer Weekly published details of the settlement in early 2006 that it was known generally that £26.5m of the announced compensation was not guaranteed.

Another problem for HMRC is that it has limited manoeuvrability in its legal discussions with EDS, for ministers do not want the government's IT-related affairs and the thinking behind specific decisions by civil servants and ministers to be aired in open court. Part of any legal case could involve questions about how much or how little ministers were briefed on the negotiations.

It's possible the government will allow HMRC to sue EDS for any unpaid balance of the £26.5m. But it is unlikely ministers will allow a court case to go through to completion without any settlement during the proceedings. A completed court case involving a major Whitehall department and a multinational IT supplier hasn’t happened in the High Court in recent memory.

When EDS and National Air Traffic Services went to the High Court in the 1990s the case was settled just as civil servants were due to take the stand.

EDS, also, would like the settlement of the £26.5m to be made without a court case. But it cannot pay large sums from its funds without providing for this in its accounts. So far the compensation agreement with HMRC has had no impact on its financial results.

So what does all this mean in practice?

It’s possible that HMRC would like the disagreement forgotten. The department has refused to answer any of my questions on the settlement saying it is confidential. So nobody outside HMRC would know now whether EDS had paid a lot or little of the £26.5m balance but for Richard Bacon MP who is one of Parliament’s most business-minded and hard-working MPs. He doesn’t let the matter drop.

His questions last week elicited the disclosure by Paul Gray, chairman of HMRC, that his department will sue EDS unless the supplier accelerates payments.

A full court case being highly unlikely, the Revenue will continue to press for accelerated payments and hope that the supplier wins some large UK government contracts. Or it will hope that Richard Bacon leaves the subject alone.

There is another option. Officials at HMRC may persuade EDS to make the balance of settlement payments from contracts it wins in the wider public sector or even from other UK contracts. If EDS agrees HMRC and its ministers will be ever so grateful.

**

Details of the settlement and the legal background:

- HMRC assesses the gross losses attributable to EDS for the computer problems at £209m, of which the figure of £105m is overpayments the department has been seeking to recover from claimants. The remaining £104m comprises £39m in overpayments that have been written-off and a further £65m in extra administrative costs and costs of fixing the computer systems.

- In 2003 HMRC began negotiations with EDS, the department's former main IT supplier, for compensation. On 22 November 2005 it announced it had settled its claim for £71.25 million. The settlement included staged payments of up to £26.5 million, contingent on EDS winning new business with the UK Government. EDS informed HMRC that it expected to receive a large amount of new business from the Government as a result of its participation in various procurement competitions both for new agreements and under existing agreements. There was no guarantee that EDS would win enough new business to trigger payment of the full amount.

- HMRC's strategy in its negotiations was to maximise the cash received from EDS and it was advised by its lawyers to accept the settlement. HMRC also explained that the settlement amount needed to be seen in the context of a contractual liability cap of £31m for each element of default. The "ASPIRE" contract with Capgemini, which replaced EDS's £2bn outsouring deal with the Revenue in 2004, includes a more severe penalty regime, though the Public Accounts Committee found that this regime inevitably affected the price of the new contract.

HMRC said that there was no public sector or other guidance for handling the type of negotiation it conducted with EDS. HM Treasury approved the settlement.

It's open to HMRC if it does not receive the full £26.5m to go to court to claim the full amount.

Links:

HMRC's settlement with EDS - House of Commons' Public Accounts Committee report

Tax Credits Fiasco costs EDS £71m - BBC online

Revenue gears up for court battle against EDS

How far is this tax fiasco down to IT?

EDS’s settlement with the government over tax credits

Compensation deal a sham says MP - Financial Times

EDS settles with HMRC for £71m - Accountancy Age

HM Revenue and Customs pays a strange compliment to its ASPIRE tax credits suppliers

HMRC attacked over EDS deal and lack of 'fair play' - Accountancy Age (2006)

MPs slam EDS compensation deal with taxman

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