The government should be ready to launch new legal action against EDS, the IT supplier for its discredited tax credit system, Edward Leigh MP, chairman of the public accounts committee, said today.

Leigh was introducing another damning public accounts committee report into the the tax credit system.

“The tax credits situation is as serious as ever. HMRC’s attempts to bring the system under any measure of control have so far not been crowned with conspicuous success,” the MP said.

The select committee was once again scathing of the November 2005 settlement with EDS for £71.25m for a series of problems with the tax credit systems.

The settlement included both cash payments by EDS and the offsetting of some work for HMRC that would have been billable by EDS.

Controversially it also included staged payments of up to £26.5m, which are dependent on EDS winning new government business.

Tax credits: the record

2 million families placed in debt

£6bn overpaid tax credits in the first three years

£2bn overpayments recovered by March 2007

£700m overpayments written off

£1.6bn provision for future write-offs

£1bn a year – cost of fraud and error in scheme

“It was always a very bad idea for the government to have to commission new work from the contractor EDS in order to recover compensation for the poorly performing tax credits computer system, Leigh said.

“In the event, EDS has stumped up very little of the £26.5m of the settlement to be paid under this arrangement. If the full amount of the settlement, £71.25m, is not paid over by the end of 2008 then HMRC must be prepared to return to the courts.”

The MPs were told by officials that HMRC has held meetings with EDS to accelerate payments this year and that the department has also instructed its lawyers to prepare for potential litigation.

The MPs noted that more than two years after a compensation agreement was reached, tax credit IT systems continue to perform poorly.

“The department has made a series of changes to the tax credits computer system, but software errors continue to affect some payments and it still has to fallback on manually processing certain awards,” the report published today stated.

“The department accepts that the computer system is fragile which makes it very difficult to improve processing. The department needs to strengthen its computer systems to make them more capable of supporting desired changes to processing,” it added.

“The amount of tax credit being lost to fraud and error is still running at some £1bn each year. The department has accepted our committee’s recommendations on the need to set targets to reduce fraud and error. It has still not put any targets in place."