HMRC prepares for court action over EDS tax credit settlement as deadline nears

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

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

Thousands of families were unexpectedly overpaid after the government introduced tax credits in April 2003, supported by a new system built by Custom and Revenue's then main supplier, EDS. HMRC sought to claw back the overpayments while struggling to reduce delays in making payments to hundreds of thousands of families.

But what HMRC did not mention in the announcement nearly three years ago was that it was quietly allowing EDS to pay £26.5m of the settlement from any future business it won from the UK government. Under the deal EDS would pay quarterly instalments of 4.5% of its 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. "HMRC remains unhappy at the rate of payments," said a spokesman.

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 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 reach a settlement 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 outsourced IT contract with Capgemini. What the case does show is that HMRC's announcement of a successful settlement with EDS could not be trusted. And 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 £6.3bn 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 has reached the surface only because of the tenacity of the Public Accounts Committee, its chairman Edward Leigh, Labour committee member Alan Williams and particularly a Tory member Richard Bacon.

Through the questioning of civil servants during a public and private session of the committee, MPs extracted most of the 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 and 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.

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 is not made up entirely of cash. The government has not given a full explanation of how EDS paid the other £44m. It is likely to comprise a mixture of tax refunds worth up to £22m, EDS's foregoing £11.2m in profit sharing on its 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 have 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. HMRC announced on 22 November 2005 that it had won a settlement of £71.25m from EDS 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.

For more detail on this story, read Tony Collins' IT Projects blog - HMRC again threatens legal action against EDS >>

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