Taxman threatens to sue EDS for credits 'bodge job'

HM Revenue and Customs, formerly the Inland Revenue and Customs & Excise, has repeated threats to take legal action against IT supplier EDS following further reports of tax credit botches and software errors amounting to £961m worth of write-offs.

After months of negotiations over a software error on an EDS-built tax credits system, the government appears to be losing patience with the supplier.

A spokesman for Revenue and Customs said: "Discussions with EDS and their legal advisors are ongoing. Court proceedings will begin if and when those discussions do not satisfactorily resolve the dispute."

An investigation by the National Audit Office (NAO) found the tax credit system has led to overpayments estimated at £2.2bn, of which almost £1bn is likely to be written off by Revenue and Customs. A total of £460m was also overpaid because of fraud and error.

The NAO report said: "During the introduction of tax credits, there were very serious problems which affected the stability, speed and availability of the computer system, which both delayed the processing of claims and led to incorrect payments being made."

A spokesman for EDS responded: "We've been in negotiations for two-and-a-half years now. We don't believe that litigation or the filing of a claim is the best route forward. If we can keep an open dialogue there should be no need for legal action. They have been talking about suing us for a long time."

Earlier this year, Revenue and Customs threatened to take EDS to court unless compensation was agreed for the overpayments.

The errors were then estimated to have resulted in overpayments to 455,000 households in 2003 totalling almost £100m, £50m of which it said would be written off.

Clive Davies, a partner in law firm Olswang, said: "It just goes to show the continuous difficulty making these large contracts work in the public sector.

"It's probably a case that the relationships haven't worked as well as the contract. The processes to avoid these sorts of things [are] better than... five or six years ago."