Select Committee on Public Accounts Thirty-Seventh Report

3  The Department's Settlement with EDS

20. Serious problems with the introduction of the computer systems used to support Tax Credits delayed the processing of claims and led to incorrect payments being made. The Department assessed the gross losses attributable to EDS for the computer problems at £209 million, of which £105 million is overpayments the Department is seeking to recover from claimants. The remaining £104 million comprises £39 million overpayments that have been written-off and a further £65 million in respect of additional administrative costs and costs of fixing the computer systems.

21. In 2003, the Department commenced negotiations with EDS (the Department's former IT supplier) for compensation. On 22 November 2005 it announced it had settled its claim for £71.25 million. The settlement includes cash payments by EDS and the off setting of certain amounts which would otherwise have been due from HMRC to EDS. Of this sum, however, staged payments of up to £26.5 million are contingent on EDS winning new business with the United Kingdom Government. EDS informed the Department that it expects to receive a large amount of new business from the Government as a result of its participation in various procurement competitions both for new agreements and under existing agreements. There is however no guarantee that EDS will win sufficient new business to trigger payment of the full amount.

22. The implications of the settlement for EDS's UK tax liabilities did not form part of the negotiation[33] and the Department's Tax Inspectors will make a judgement on the tax treatment in the normal way.[34] The maximum tax deduction EDS could obtain for the compensation is 30% of the settlement.[35]

23. The Department's strategy in its negotiations was to maximise the cash received from EDS[36] and it received advice from its lawyers to accept the settlement.[37] The Department also explained that the amount needed to be seen in the context of a contractual liability cap of £31 million for each element of default.[38] As noted in our predecessor's Report of September 2005[39] the contract with the Department's new IT provider, Capgemini, includes a more severe penalty regime, although such clauses inevitably affect the price of the contract.

24. The Department commented that there was no public sector or other guidance for handling this type of negotiation.[40] The final settlement was accepted by the HMRC Chairman and his Departmental Executive Committee. HM Treasury approved the settlement, but did not influence its shape.[41]

25. The terms of the agreement include a confidentiality requirement. Final settlement of the dispute is contingent on EDS paying the full amount of £71.25 million, and the Department has reserved the right to reopen court proceedings if the full amount is not received. The Department therefore considers that the nature of its case against EDS and its overall strategy needed to remain confidential because it would be at a disadvantage if it had to make public its litigation tactics or any part of its lawyers' assessment of the strengths and weaknesses of the case against EDS.[42]

26. Further distress and hardship to families may result from the recovery of overpayments of tax credits arising from these computer problems. It is not clear if the Department will recover the full £105 million of overpayments and some may be written off. The Department's ability to recover this amount will be important in assessing the value for money of the settlement.

33   Q 171 Back

34   Q 185 Back

35   Q 173 Back

36   Q 170 Back

37   Q 177 Back

38   Q 159 Back

39   5th Report from the Committee of Public Accounts, Inland Revenue: Tax Credits and deleted tax cases (HC 412, Session 2005-06), para 24 Back

40   Q 231 Back

41   Qq 169-170 Back

42   Q 127 Back

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Prepared 25 April 2006