Taxman's IT bill could rocket to £6bn

The total cost of HM Revenue and Customs' (HMRC) IT contract with Capgemini could more than double to over £6bn instead of the originally projected £3bn, government auditors have warned.

The 10-year £3bn Aspire contract was awarded to Capgemini at the end of 2003 after HMRC replaced the incumbent supplier EDS.

But a report by public spending watchdog the National Audit Office (NAO) has revealed that HMRC spent £539.3m in the first year of the contract from July 2004 to June 2005 instead of a projected £383.8m, with expenditure for the second year expected to be around £800m.

This rise in spending has been attributed to HMRC's increased demand for IT services and projects. The higher than expected demand has in turn generated a higher profit of around £53.9m in the first year for Capgemini, instead of a projected £38m.

That keeps the figure within the overall agreed profit margin target of 12.3 per cent for Capgemini. The Aspire contract contains a clause that allows HMRC to claim a share of any profit made above that margin.

But the NAO report warned: "If this level of higher spending continues at the same level over the lifetime of the contract, the final cost of the Aspire contract could be in excess of £6bn rather than the originally projected £3bn to £4bn."

HMRC said it does not expect that level of spending to continue and explained that its demand for IT services will decline because of targets for reducing staff levels by 12,500, an increase in the use of electronic services, the rationalisation of IT systems and a target to cut IT spending to less than 20 per cent of the department's total budget.

HMRC was also forced to pay for IT suppliers to bid against EDS when the contract was put out to tender but the NAO said the department had successfully demonstrated that the public sector is not "locked in" to big contracts with incumbent suppliers.

HMRC paid a total of £75m in procurement and transition costs, including £37.6m to Capgemini and £5.7m to Accenture and EDS.

The NAO estimates that if HMRC's approach and best practice is adopted across the public sector, it could save 10 per cent in procurement and transition costs when re-competing major contracts - and called on the Office of Government Commerce to take a lead in providing guidance in the future.

Head of the NAO, Sir John Bourn, said in the report: "The department successfully completed the first major re-competition of a large public sector IT contract and transfer from one supplier to another without a loss in service to the taxpayer."