HM Revenue and Customs (HMRC) is threatening to sue services supplier EDS unless it steps up compensation payments for failures in its IT support for the tax credits scheme, which led to tens of millions of pounds in overpayments.
Revenue chairman Paul Gray said his officials had carefully archived "millions of relevant documents" in preparation for a court case he hoped would not happen.
The tension between the two sides comes after they signed a controversial deal in November 2005, in which EDS agreed to compensate HM Revenue and Customs over tax credits by paying £44m upfront, and a further £26.5m contingent on EDS winning future government contracts.
By the end of 2006 EDS had paid less than £250,000 of the £26.5m - at that rate it would take about 100 years to pay off the full amount.
Gray told the House of Commons Public Accounts Committee last week, "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 held discussions with EDS global chairman Michael Jordan after expressing a "real concern" about the low level of payments.
Replying to questions by MP Richard Bacon, Gray told the committee, "What I can say is that the flow of further payments over the past few quarters has continued to be extremely small. It is quite clear that over the past two years 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 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."
Last week EDS agreed measures with HMRC that should lead to increased payments from January 2008. Gray said, "However, the proof of the pudding will be in the eating."
There is no suggestion that EDS has breached the agreement with HMRC. The settlement of the £26.5m is subject to how much UK government business it won.
EDS declined to comment.