HMRC again threatens legal action against EDS

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When civil servants announced they had reached £71.25m settlement with IT services supplier EDS over problems with tax credits IT systems, they left out some important details.

After tax credits were introduced in April 2003 - supported by a new system built by EDS, the main IT supplier to HM Revenue and Customs at that time -  thousands of families were unexpectedly overpaid. HMRC sought to claw back the overpayments while struggling to reduce delays in making payments to hundreds of thousands of families.

In November 2005 HMRC announced it had reached a settlement with EDS on compensation for the IT problems over the introduction of tax credits. But what was not mentioned in the announcement was that EDS was being quietly allowed to pay £26.5m of the settlement from any future business it won from the UK government. Under the deal it would pay quarterly instalments of 4.5% of income from future government work over three years.

The time is up in December this year. But EDS has not won the contracts it had hoped for from the UK government, leaving it well behind on its payments, Computer Weekly has learned.

HMRC has confirmed that much of the £26.5m remains outstanding. The department says it has compiled "millions of documents" in preparation for a possible hearing in the High Court to recover the money. Its spokesman told us this month: "It is still less than three years since the settlement. HMRC has not yet initiated court action, but it keeps every option, including legal action, under review... HMRC remains unhappy at the rate of payments."

In October 2007, the then chairman of HMRC, Paul Gray, told MPs that he had been in contact with the chairman of EDS in the USA over the settlement. Gray said:"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 the full amount of the settlement even if the flow of new business to EDS is not enough to generate the full payment to us." He added:

"I have been discussing with our lawyers a process for bringing the matter back to the courts if the acceleration of payments during the course of next year [2008] does not meet my expectations."

In February 2008 the Public Accounts Committee said in a report that the flow of payments from EDS "has been extremely small, and it is highly unlikely that new business to EDS will generate the full payment". The committee recommended that HMRC " should consider litigation if the full amount of the settlement is not forthcoming in 2008".

In June 2008 Dave Hartnett, the acting chairman of HMRC, who is now the department's acting CEO, told MP Richard Bacon at a hearing of the Public Accounts Committee: "I have had meetings in the last two or three weeks with both EDS and our lawyers. It [HMRC's effort to obtain the full £26.5m] continues, Mr Bacon." He said that the talks had not gone "as well as we had hoped" and added: "I think EDS probably feel they are not winning the contracts that they planned to win, but both I in the past and Mr Gray [Paul Gray, former HMRC chairman] have said that our patience is not infinite, and that is where we stand at the minute".

But this could change. It is possible that EDS may make a significant payment before the end of year, which could make legal action less likely. If this conciliatory move happens, some in the IT industry are likely to attribute it to HP's take-over of EDS. HP would not relish EDS's coming with the baggage of an outstanding legal dispute with one of the government's largest departments.

HMRC has the right to charge a high interest rate on any of the £26.5m outstanding after three years, providing an incentive for EDS to settle soon. 

Whether the £26.5m is paid by EDS will matter little to the public purse, or to HM Revenue and Customs which spends at least £500m a year on its "Aspire" outsourced IT contract with Capgemini. What the case does show is that HMRC's announcement in 2005 of a successful settlement with EDS could not be trusted. It raises the wider question: can any major government IT-related announcements be trusted?

The NHS's IT programme, for example, was announced as a £2.3bn scheme, and later as a £6.2bn programme until in 2006 the National Audit Office revealed it was a £12.4bn project.

Similarly, the government's announcements about the business reasons for the ID Cards scheme kept changing. This could create the impression, rightly or wrongly, of a lack of professionalism and cohesion within government.

The facts of the settlement between EDS and HM Revenue have reached the surface only because of the tenacity of the Public Accounts Committee, its chairman Edward Leigh, Labour committee member Alan Williams and particularly the Tory member Richard Bacon.

Through the questioning of civil servants during a public and private session of the committee, MPs extracted most of terms of the settlement. They were amazed by it, and the fact that the Treasury not only approved it but considered it "pragmatic".

Alan Williams said: "It looks as if it is all a bit illusory, a presentational package."

The then chairman of HM Revenue and Customs claimed that the settlement was commercially astute, that it was a good settlement considering that EDS's business was not particularly strong at the time. The department's lawyers thought that even if they recovered only £44m of the £71m settlement, that was good going, he said. 

But the Public Accounts Committee was highly critical of the settlement.

It said: "Government should not be placed in the invidious position of having to commission further work from a contractor in order to recover compensation for underperformance."

The committee also criticised the secrecy surrounding the settlement. "The terms of the settlement are covered by a confidentiality clause and have not been disclosed by HMRC or EDS. Confidentiality arrangements should not be accepted where they will impair accountability for public money."

Even the part of the settlement beyond the £26.5m - about £44m - is not made up entirely of cash. The government has not given a  full explanation of how EDS paid the £44m. It's likely to comprise a mixture of tax refunds worth up to £22m, EDS's foregoing £11.2m in profit sharing on its former outsourcing contract with HMRC, and cash.

Should HMRC be worried that its original announcement of the settlement was misleading? Successive chairmen of HMRC have insisted that it was an exemplary settlement - and they've since changed their jobs. As have their ministers. Which leaves nobody accountable.

What went wrong with tax credits

Serious problems with the introduction of computer systems in 2003 to support tax credits delayed HMRC's processing of claims and led to incorrect payments being made to claimants.

HM Revenue and Customs estimated that software errors led to overpayments of £184m in 2003-04 and 2004-05. The department spent a further £65m on extra administration and fixing the system.

The government began negotiations with EDS, the Revenue's former IT supplier, for compensation In 2003, it. On 22 November 2005 HMRC announced it had won from EDS a settlement of £71.25m as compensation for IT problems over the introduction of tax credits.

Public accounts MPs who investigated the settlement discovered that £26.5m of the £71.25 was dependent on EDS's winning future government business.  They learned that there was no guarantee that EDS would win enough new business to trigger payment of the full £26.5m.

A key document in HMRC's legal arsenal?

At a private session of the Public Accounts Committee Dave Hartnett, now acting CEO of HMRC, read from a certificate which he said EDS had given his department shortly before the tax credits  system went live in 2003. Hartnett said:

"If I might, can I just read you the certificate that was given to us by EDS just before we went live? It said this: 'I consider that this release of software is fit for purpose of supporting all current and agreed business and statutory requirements for live use in support of business requirement computer systems to help the Inland Revenue's obligation to provide new Tax Credits'. They signed off the system as fit for purpose."

But the tax credits fiasco is not all EDS's fault - a chronology  

HMRC knows that if it goes to court to enforce the settlement its lawyers will have to answer allegations relating to the department's own failings. Below is a summary of the events which led to the disastrous introduction of the tax credits scheme.

It is, in many ways, a typical IT implementation story: business case uncertainty, specification creep, implementation problems and truncated testing. However, the tax credits scheme also had an unmovable deadline and the consequences of failure were highly visible.

November 1999

The government made the main announcement of new tax credits and committed to their introduction from April 2003. The system was to be built by Inland Revenue's main IT supplier, EDS.

January 2000

The IT programme was launched. The plan was to get the business case approved by September 2000. The initial intention was for two releases: development of release one to start in October 2000 and go live in January 2003. Development of release two was to start in April 2001 and go live in April 2003.

January - December 2000

There were major policy uncertainties about the way new tax credits would be implemented. By January 2001, there still was not an IT requirement fit for use in starting development.

April 2001

EDS started building release one but there were still uncertainties about the design of the tax credits and about the business processes to be used. Even so, EDS had to set a requirement and make a start. The coding was already six months late.

April 2002

Focusing on how to succeed with release one despite a compressed timetable meant work on release two started in April 2002 - 12 months late. And the scope of release two increased by about 50% as more complexity was added.

October 2002

Release one went live on schedule, allowing returned claim forms to be entered on the system. Release one had taken more than 500 man-years of work to develop and implement.

November 2003

EDS was due to start end-to-end system testing of release two, but could not because the Revenue had not finalised key requirements. About 60 change requests were made after system testing was due to start. A Gateway review by the Office of Government Commerce gave the systems a green light to go live.

January 2003

Inland Revenue discovered more than 100,000 claims had the wrong national insurance numbers. This was because clerks, presented with someone's name on their screens, had arbitrarily selected the first identity from a list of potential matches.

The Revenue stopped sending out award notices to claimants while mismatches were rectified. The result was that millions of claimants, having heard nothing about the progress of their claims, called the Revenue's phone lines, which subsequently jammed up.

It was critical to rectify the mismatches before going live, so officials and EDS decided to use their test system to do this. As a result the system was held at release one and could not be used for release two performance testing.

February 2003

Performance testing ran for only four weeks, instead of the planned 12, while the mismatches problem was rectified. Following this testing, Inland Revenue resumed issuing award notices in small volumes.

EDS warned that using the test system to resolve mismatches had increased the chances of problems occurring when the system went live but it did not advise the Revenue to put back the April deadline; nor did the Revenue advise the chancellor to defer the deadline.

March 2003

The race was on to meet the April deadline.

April 2003

Release two went live on 8 April. About 1.1 million claims had incomplete information or some other problem that required officials to contact claimants.

Helplines were swamped as people received award notices at the last minute or found they were among the 1.1 million still to be processed. This put extra pressure on the system and it soon emerged that the system was not stable.

Bottlenecks in links between computers had not been identified during testing and the system stopped several times a day. The processing of the 1.1 million outstanding claims was severely disrupted.

June 2003

Stability of the system was restored on 13 June.

November 2003

Release three went live without problems after nearly 200 further man-years of effort.

April 2004

Release four of the tax credits system is due to go live. It is a major release, critical to the renewals of tax credits - but there is no contingency plan to defer the date if testing reveals major flaws in the system or software. 

Links:

HP surprises Wall St with size of EDS job cuts - ABCnews, Sept 2008

HMRC's announcement of settlement with EDS - November 2005

Public Accounts Committee report on tax credits and EDS settlement - March 2006

Public Accounts Committee report on tax credits and EDS settlement - February 2008

HMRC prepares for court action against EDS over tax credits as deadline looms - Computer Weekly, Sept 2008

Taxpayer still owed millions by EDS - Silicon.com, February 2008

HMRC waits for EDS cash - Kablenet, February 2008    

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