HM Revenue & Customs this week accepted £71.25m from Electronic Data Systems (EDS) to settle its claim for compensation for the problems caused by EDS's computerised Tax Credit administration system.

Paymaster general Dawn Primarolo announced the settlement in a written statement issued to Parliament on Tuesday, which added: "Details of the settlement are commercially sensitive and therefore bound by a legal confidentiality agreement as is normal in agreements of this nature."

When the new credits were introduced in 2003, thousands of claimants were left without payments because of flaws within the computerised processing system. According to Parliamentary ombudsman Ann Abrahams, "systematic maladministration" [1] resulted in difficulties for 1.9m families.

At the time the new system was introduced, it could not cope with the numbers of Revenue staff logging on and was reported to crash daily [2] as a result of the workload.

Former CIOT president and Solomon Hare tax partner Richard Mannion commented the time: "This entire affair has been a complete fiasco." He estimated in August 2003 that at least 400,000 claimants received their first payments late, another 200,000 had to receive emergency payments and that 220,000 cases were unresolved nearly four months after the Tax Credits system was introduced.

Faced with delays and the lack of response from telephone helplines, Mannion advised claimants to visit their local Inland Revenue offices, where at least staff had access to the computer system and could pay out hardship cheques.

In his review of the situation in August 2003, Mannion noted the Revenue's explanation that the main cause of the problems was the EDS computer.

Mannion told AccountingWEB this week he was concerned that the £71m settlement might "throw people off the scent that the system is fundamentally flawed".

"You're always going to be problems, no matter how good the computer system is. You have a system with overpayments built in. You overpay poorer people who spend the money, then you go back and demand the money back. I can't see how the system can continue with that fundamental flaw in it."

According to Mannion, "EDS are an easy target. They weren't responsible for designing the system. They computerised what they were given. Tax Credits were designed in a secret silo, and nobody was allowed to know what was going on. Now who's going to put it right?"

The tax credits fiasco remains the biggest problem facing the new HMRC management team. The department's accounts were qualified for the third year in a row in October for the unacceptable error rates [3] in Tax Credit payments.

HMRC chairman David Varney appreciated that overpayments are an inherent feature of how the credits are claimed. Overpayments in 2003/04 were thought to be worth £2.2bn, but Varney has appointed HMRC deputy chairman Paul Gray to task force to compile accurate figures and work out how to tackle the continuing problems. Gray will present an update in the spring.

In the meantime, the HMRC accounts for 03/04 included a £481m provision for doubtful debts that would not be collected from claimants, with a similar figure budgeted for 04/05. The 03/04 provision figure included £37m relating to "IT glitches"

Following the settlement with EDS, HMRC chairman David Varney commented: "We have achieved a settlement of this complex dispute with EDS agreeing to pay compensation. The Tax Credits IT problems had an adverse impact on many Tax Credits claimants.

"We were determined to reach a fair settlement for the taxpayer, and I believe that has now been achieved."

Tax credits computer fiasco - the whole sorry saga