The IT system at the crisis-stricken Child Support Agency cannot handle maintenance claims that are in dispute between parents, ministers have admitted.

The CSA was set up to calculate and collect child maintenance payments from parents who do not live with their children.

Last year, the government announced that the agency had failed and would be axed – a move hastened by a damning National Audit Office report into the £456 million CS2 case management system, provided by EDS under a 10-year private finance initiative contract.

Earlier this month, MPs revealed that the IT system at the doomed agency still had 500 defects three years after it was built – and an improvement plan would cost up to £320m – on top of £539m spent on child support reforms since 2000.

But work and pensions minister Anne McGuire has thrown new light on the nature of the IT defects and their impact on crucial areas of the CSA’s work, telling MPs that payments contested between two parents cause the system to break down.

“Unfortunately almost all counter-claims – one parent against another – result in an IT system malfunction,” McGuire said, in response to questions from Conservative MP Geoffrey Clifton-Brown about two of his constituents.

She added that a “clerical office” had been set up in Bolton to deal with “all clerical cases that, owing to technical issues with our IT system, could not be progressed through the agency’s system”.

More than 35,000 clerical cases were now being processed in Bolton, McGuire confirmed.

All clerical cases would be transferred back to the IT system during 2008 and 2009, the minister said. She claimed that “the most serious defects... have been resolved”, while the remaining IT faults were due to be corrected later this year.

New Department of Work and Pensions figures show that at the end of June, just 45% of the CSA’s 1.35m cases had been transferred to the new CS2 IT system, with 55% still held on predecessor systems.

But it is understood that the CSA’s annual report – due this month – has been delayed.

Government legislation to create a new Child maintenance and Enforcement Commission (C-MEC) to replace the CSA is now being debated by parliament.

But in March, the Commons work and pensions committee warned there was “no evidence” that C-MEC and its IT system would avoid a repeat of the CSA fiasco.