HMRC is considering court action against IT services contractor EDS over the level of compensation EDS has so far paid under a controversial deal which linked compensation payments arising from EDS’s failures in supporting the tax credits scheme to future government contracts.

Problems with a computer system provided to implement tax credits at HMRC led to millions of pounds of overpayments. HMRC signed the £71.25m compensation deal with the firm in November 2005, with more than £25m of the settlement dependent on the contractor winning future government work – a provision strongly criticised by the Public Accounts Committee.

But last week HMRC chair Paul Gray told the committee that the level of payments made by EDS so far had been “lower than expected”. At the end of last year, payments made under the clause were just £250,000. Gray said: “The flow of further payments over the last few payments continued to be extremely small.”

Gray had met senior EDS executives and “agreed steps that we believe will accelerate the rate of payments from January 2008”, but pledged to “return to litigation” to secure the full balance. HMRC was determined to recover the money even if the flow of new business to EDS was not sufficient to fund the repayments, he told the MPs.

The dispute is the latest in a succession of run-ins between the public sector and EDS over problems with key systems.

A dispute between the NHS’s National Programme for IT and EDS over a £90m email and directory services contract – which was cancelled by the NHS after low take-up of the service – was settled in July 2004, "without any attribution of blame to either party."

EDS also supplied the £456m CS2 case management system to the failed Child Support Agency, which now faces the axe. A 2006 report by the NAO criticised both the EDS IT system and the CSA’s management of the contract. Earlier this year MPs revealed that the system still had 500 defects three years after it was built – and an improvement plan would cost up to £320m.

But EDS has also notched up successful contract wins. In March 2005, an EDS-led consortium scooped a £4bn IT services contract with the Ministry of Defence – a 10-year deal thought to be one of the largest IT outsourcing contracts ever.