John Bourn, the head of public spending watchdog the National Audit Office, said the two sides have been involved in discussions since late last year over the underlying technical problems over the introduction of tax credits, compensation for "unsatisfactory performance of the system" and the possibility of legal action.
"The department and EDS told me that a structured process of confidential discussions on these matters was continuing as I concluded this report. In order not to prejudice their discussions I have not examined these matters further," said Bourn in a report published last week on an audit of the Inland Revenue's accounts.
A software error caused the system to generate incorrect payments resulting in overpayment of tax credits to 455,000 households, amounting to some £94m. Of this amount, the Revenue is to write-off overpayments individually less than £300, affecting 373,000 households and costing £37m. It will seek to recover larger amounts from 82,000 households, amounting to £57m.
Taking into account the write-offs and internal administrative costs, the Revenue could lose between £55m and £61m as a result of overpaid tax credits.