3 The Department's Settlement with
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
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
and the Department's Tax Inspectors will make a judgement on the
tax treatment in the normal way.
The maximum tax deduction EDS could obtain for the compensation
is 30% of the settlement.
23. The Department's strategy in its negotiations
was to maximise the cash received from EDS
and it received advice
from its lawyers to accept the settlement.
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.
As noted in our predecessor's Report of September 2005
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.
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.
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
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
Q 185 Back
Q 173 Back
Q 170 Back
Q 177 Back
Q 159 Back
5th Report from the Committee of Public Accounts, Inland
Revenue: Tax Credits and deleted tax cases (HC 412, Session
2005-06), para 24 Back
Q 231 Back
Qq 169-170 Back
Q 127 Back