Tax credits compensation linked to EDS contract wins

HM Revenue and Customs has struck an "extraordinary" deal with EDS in which a large amount of compensation paid by the IT services company for the introduction of the troubled tax credits system is based on the future government business it wins.

HM Revenue and Customs has struck an "extraordinary" deal with EDS in which a large amount of compensation paid by the IT services company for the introduction of the troubled tax credits system is based on the future government business it wins.

The settlement was announced last November, when HMRC said the supplier had agreed to pay £71.25m in compensation.

HMRC had claimed compensation from EDS, the supplier of the tax credits system, after some claimants received incorrect payments because of IT-related problems. Officials had described the compensation payable by EDS as a record sum for the settlement for an IT-related dispute.

Now it has emerged that the £71.25m figure is far from guaranteed. Nearly £30m of the sum is based on EDS's winning new contracts from the government. It will pay the compensation in installments, based on the value of the contracts it wins.

Although EDS can win deals only on the basis of open competition, the agreement with HMRC gives the government an implicit financial incentive to award contracts to the supplier. However, a spokesman for HMRC said it would ensure that no favouritism was shown to EDS.

If the company does not win future business from the government, or the contracts are smaller than expected, HMRC Revenue and Customs may be left having to go to court to claim the money.

The department had spent more than a year negotiating a settlement with EDS to avoid going to court - in part because it is unclear which side would have the stronger case in any proceedings. But the possibility of a court case still looms if EDS does not pay all it is expected to on the basis of future contracts.

Liberal Democrat shadow chancellor Vincent Cable described the deal as "extraordinary" and said, "It is extremely dangerous to make settlement on the basis that a company may win future contracts. That may be bad value for money for taxpayers, and it creates uncertainty."

A spokesman for EDS said, "The level and structure of payments within the agreed aggregate settlement between EDS and HMRC of £71.25m are wholly reflective of the relative merits of both parties' cases."

EDS also commented on the confidentiality of the settlement. "A level of confidentially is standard practice in settlements such as this. EDS's specific requirements regarding the disclosure of information about the settlement were consistent with obligations to our shareholders.ÊEDS made no further requirements regarding confidentiality beyond this. EDS was respectful of HMRC's requests regarding HMRC's disclosure obligations."

Computer Weekly has learned that some of the compensation is derived from a tax refund EDS may be due as a result of paying compensation.

An HMRC spokesman said, "There is no link between the settlement and EDS's tax liability beyond any normal tax deduction that a company making a compensation payment can expect."

Asked whether the deal to base compensation on a supplier's future business with the government was unprecedented, HMRC said, "The settlement with EDS is unique in scale (as far as we are aware) for a legal dispute over an IT project in the public or private sector in the UK. Therefore there is no comparison to make."

On the question of whether HMRC may have to take EDS to court - although it had tried to avoid proceedings by negotiating a settlement - the spokesman said, "If EDS does not meet the settlement in full, HMRC would expect to pursue any outstanding balance (and any other related claims) through the courts. If EDS does not pay, then it is true that HMRC and EDS may be back to a court proceeding."

The link between the compensation package and EDS's future business slipped out during a hearing of the Public Accounts Committee when David Varney, chairman of HMRC, was being questioned by MP Richard Bacon.

Bacon has since asked ministers to disclose the total value of contracts awarded to EDS since the Public Accounts Committee hearing on 14 December 2005, and the payments made by the supplier.

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