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A committee of MPs has said the government has received little of the compensation due from EDS for problems with tax credit IT.

EDS has paid only a fraction of the £26.5m due to HM Revenue and Customs (HMRC) as compensation for problems with the delivery of a tax credit computer system, says a report by the Public Accounts Committee.

It is not certain that the full amount will be paid before the end of the year and the committee urges the department to accelerate the rate of payments and take legal action if necessary.

The tax credit computer system, supplied by EDS, was plagued by problems from the start, which led to hundreds of thousands of claimants being paid late and to substantial overpayments.

In 2005 HMRC announced that it had reached a settlement with its IT supplier for compensation of £71.25m. This sum included cash payments by EDS for the offsetting of certain amounts that would otherwise have been paid to the company by HMRC. Controversially, the payment of compensation was also based on the condition that EDS won further business with Whitehall.

EDS has been less successful in winning new contracts than HMRC expected, so that the flow of payments has been very slow. New business won by EDS by the end of the year is unlikely to generate full payment by the end of 2008, according to the report. Acknowledging this, the department expects that it will take a long time to receive its full dues.

In an earlier report, the committee criticised the "indivious arrangement" by which the government is forced to buy further services from a contractor in order to receive compensation for underperformance.

Edward Leigh, chair of the committee, said: "It was always a very bad idea for the government to have to commission new work from EDS in order to recover compensation for the poorly performing tax credits computer system.

"In the event, EDS has stumped up very little of the settlement to be paid under this arrangement. If the full amount of the settlement, £71.25m, is not paid over by the end of 2008, then HMRC must be prepared to return to the courts."

Another concern is that the amount of tax credit being lost to fraud and error is still running at some £1bn each year. The committee says that, despite the department's acceptance of its recommendations on the need to set targets to reduce fraud and error, it has failed to put any targets in place.

The scale of overpayment to claimants remains high. Although the tax credits system was designed to incorporate some overpayment, because initial awards are provisional, it was not meant to reach the extent of £6bn in three years. The report finds that this money was supposed to be recovered from claimants, but £2.3bn worth has been written off or is unlikely to be returned.

This article was originally published at Kablenet.

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