1 Problems with the new Tax Credit
system
1. The Government introduced Child Tax Credit and
Working Tax Credit for payment from April 2003 and received some
4.5 million applications by the end of June 2003. These two tax
credits are expected to cost some £16 billion per year. The
Department's IT service provider, EDS, created a new IT system
for processing the new tax credits. It links to other Inland Revenue
databases and exchanges data electronically with the Department
for Work and Pensions to help check tax credit claim forms.[3]
2. The Office of Government Commerce have a government-wide
role for advising Departments on IT projects and they conduct
Gateway reviews during major IT system developments. In December
2002, the Gateway 4 review, "Readiness for Service"
described the new tax credit programme as "an exemplar of
good programme management", while noting that a large amount
of work remained against a tight schedule. The implementation
of new tax credits was overseen by a Programme Board, chaired
by the Inland Revenue, with senior representation from the Department
for Work and Pensions and EDS. The Board received regular progress
reports from Inland Revenue and EDS teams and monitored progress
in implementing the projects.[4]
3. When the new tax credits schemes went live for
payment in April 2003, problems with the IT systems resulted in
several hundred thousand claimants receiving payments after they
fell due, while the Department were unable to reconcile payments
made with amounts authorised.[5]
4. Analysis of the technical problems by EDS and
"tuning" the system to perform more reliably took several
weeks. EDS did not achieve a stable system until after 10 weeks
of live operations.[6]
In July 2003 the Department engaged consultants to conduct a review
to provide independent assurance about the analysis of the technical
problems and the action being taken to address them. The Department's
consideration with EDS of the underlying technical problems had
to have regard to the discussions between them about compensation
for the unsatisfactory performance of the system and the possibility
of legal action. For the past two years, EDS have also been re-competing
for the Department's overall IT service provision, in a project
called ASPIRE.[7] The Department
announced on 11 December 2003 that Cap Gemini Ernst & Young
(CGEY) had been selected as the Department's preferred supplier
for the ASPIRE Contract, rather than the consortium that included
EDS.
5. The C&AG's Report recorded the view of the
Department and EDS about the testing of the new tax credits systems
in the following terms: — They had worked together with
other parties involved, on testing to make sure that key functions
needed for April were ready. This was a complex task. To ensure
robust IT functions were available at the time they were needed,
the testing strategy was to prioritise the functionality needed
first, and to delay less urgent testing. The period of instability
in the early months of the live service was caused by queues building
up in the channels between system components. The causes of these
queues were not detected during testing. The nature of the particular
testing regime meant that the underlying technical faults could
not have been discovered and corrected in testing although more
testing might have reduced the effects of some of the problems.[8]
6. The Department and EDS had not foreseen that the
new tax credit systems would prove unstable and not fit for purpose.
EDS recognised the disruption that was caused within the Department
and the pain in the country at large, and they deeply regretted
the consequences of the system instability. They prioritised the
testing to make sure that they could get tax credit payments to
people and the testing that was undertaken did not identify the
problems that eventually resulted.[9]
7. The Department relied on advice from EDS as to
what was feasible. EDS gave the best advice they had at the time,
but it proved to be wrong and they accept responsibility for their
advice and for the IT systems being unstable. EDS accepted that
the instability contributed to the overall New Tax Credit problems
and that they shared some responsibility with the Department.[10]
8. EDS emphasised that the project was one of the
most challenging the Government had ever undertaken and that the
timetable had been compressed. There was a six week delay while
the rules for calculating tax credits were finalised. The 19 week
system testing window had been cut significantly. In particular
the volume testing timetable was cut from 12 to 4 weeks because
EDS had to solve problems with National Insurance numbers. Both
EDS and the Department considered that the compressed timetable
had adverse consequences for the project.[11]
9. EDS said that if they had been aware during the
testing period that they would have the problems which eventually
resulted, they would have advised the Project Board not to go
ahead with the system. Likewise if the Department had had any
indication that the system would not be fit for purpose they would
have advised Ministers to invoke the contingency arrangements.[12]
10. In their partnership with EDS, the Department
had been concerned not to duplicate the functions of EDS. With
the benefit of hindsight, they have looked at what went wrong
with the New Tax Credits systems. For the forthcoming tax credit
system extension they have retained Deloitte and Touche to work
for the Department to make them a more intelligent customer.[13]
The Department and EDS are also considering what lessons can be
learned about technical system design and testing strategy, including
the effects of a compressed testing timetable.[14]
11. This Committee and our predecessor Committees
have criticised on several occasions major IT systems and developments,
including the National Insurance Recording System (NIRS2) and
the Passport Office system, both of which involved partnerships
with IT suppliers. The problems with NIRS2 showed the dangers
of setting too tight a deadline for implementing the Pensions
Act 1995 and not properly assessing the effect on NIRS2 of changes
to pensions and national insurance legislation.[15]
The Passport Agency were far too optimistic in assuming that their
new system, involving substantial changes in working methods,
could be implemented over a few months without detriment to services.[16]
12. The Department transferred many staff from other
work to deal with the problems with new tax credits. They subsequently
revised their business plans and made arrangements to catch up
on the backlogs where possible. They have not quantified the overall
cost of what went wrong or the opportunity cost, but consideration
of those matters will inform their negotiations with EDS over
the scale of compensation. The Department believe that their contract
was robust and they hope to negotiate a reasonable level of compensation
without litigation.[17]
For their part EDS acknowledge that they have some responsibility
for the problems that were caused when new tax credits went live.
Discussions on compensation were continuing at the time of the
Committee's hearing in December 2003.
3 C&AG's Report, paras 3.1, 3.7 Back
4
ibid, paras 3.8-3.9 Back
5
ibid, para 3.21 Back
6
Q 74 Back
7
C&AG's Report, paras 3.11-3.12 Back
8
C&AG's Report, para 3.13 Back
9
Qq 2, 15, 22 Back
10
Qq 24, 65, 175 Back
11
Qq 74, 19, 42 Back
12
Qq 152-154, 88 Back
13
Q 45 Back
14
C&AG's Report, para 3.13 Back
15
38th Report from the Committee of Public Accounts,
NIRS 2: Contract Extension (HC 423, Session 2001-02) Back
16
24th Report from the Committee of Public Accounts,
The Passport Delays of Summer 1999 (HC 208, Session 1999-2000) Back
17
C&AG's Report, para 3.14; Qq 83, 121 Back
| 
