HMRC still owed millions by EDS

MPs have called on the government to take legal action against outsourcing giant EDS to recoup the millions of pounds the company still owes over the tax-credits IT fiasco.

In a settlement EDS agreed to pay £71.25m to HM Revenue & Customs (HMRC) due to problems with the tax-credit computer system it designed.

Difficulties with the scheme resulted in HMRC overpaying £6bn in tax credits during the three years after its introduction in 2003.

EDS agreed it would pay £26.5m of the settlement when it was awarded new contracts by the government, but a report by parliamentary spending watchdog the Public Accounts Committee (PAC) has found the IT services company has repaid "little" of this sum — because the government has awarded EDS less work than expected.

PAC chairman Edward Leigh MP warned that "HMRC must be prepared to return to the courts" to recoup the full amount from EDS if it is not repaid by the end of 2008.

HMRC chairman Paul Gray — who has since resigned over the loss by his department of two CDs containing 25 million child-benefit records — told the PAC hearing that the department would return to litigation if necessary.

The PAC report says the tax-credit system continues to suffer the "highest rate of error and fraud in central government", with about £1bn of tax credits still being lost to fraud and error each year.

HMRC admitted to PAC that the computer system, now looked after by Capgemini, remains "fragile", making it difficult to improve tax-credit processing and with software errors still affecting some payments.

Richard Bacon MP, a member of PAC, said it would take EDS 106 years to repay the settlement at the current rate.

Bacon told ZDNet.co.uk sister site silicon.com: "The vast majority of the £26.5m has not been repaid. The monies are still owed to the taxpayer. It is quite obvious that this settlement is not working. The computer system was launched before it was ready and the government has been playing catch-up ever since. It is like designing a runabout car for going shopping and then using it for a Sahara rally."

In a statement, PAC chairman Leigh said: "The tax-credits situation is as serious as ever. HMRC's attempts to bring the system under any measure of control have so far not been crowned with conspicuous success. The amount of tax credit being lost to fraud and error is still running at some £1bn each year."

Leigh said the committee will review this again in future to see how the problems with the tax-credit system have been addressed by HMRC.

A spokeswoman for EDS said the company has not breached the terms of its settlement agreement, which links repayments to new business EDS wins with the government.

She said: "HMRC and EDS successfully concluded an aggregate settlement of £71.25m, including an upfront payment and payments of additional amounts over time. The payment of additional amounts was contingent upon certain, specific criteria being met. The settlement was negotiated in good faith with HMRC and is consistent with EDS's assessment of the merits of HMRC's case. EDS remains fully compliant with the terms of this settlement. We continue to maintain a dialogue with HMRC."

A spokeswoman for HMRC said: "This report relies on data captured only up to 2006. As a result of a series of improvements, overpayments have fallen by a fifth and accuracy in processing payments has reached 97 percent. HMRC's security measures stopped the vast majority of fraudulent claims before any money was paid out."

She said that major changes to the tax-credit system were expected to reduce overpayments by a further third.