HMRC's tax credits overpaid £2.2bn a year — and EDS refunded just £70m

In April 2003 the Inland Revenue launched Child and Working Tax Credits — the flagship in-work benefit — on a new EDS-built computer system that, in the National Audit Office's words, 'did not work as intended', forcing the Revenue to move staff off other tax work to cope. The Revenue went on to distribute some £13.5bn through the new credits in 2003-04, and the NAO qualified its audit opinion on the department's Trust Statement accounts for the second year running because it could not measure the error.

The overpayments were not a glitch: the award design paid a year ahead on previous-year income, so any family whose income rose mid-year was paid too much and then chased for repayment. Almost half a million of the poorest households were overpaid £2.2bn in 2003-04; the Public Accounts Committee estimated the same £2.2bn again for 2004-05, and the government admitted around £1bn of the first two years' overspend would never be recovered. PAC chairman Edward Leigh put it flatly: overpayment was 'an inherent part of the design of the tax credits system'.

The blame fight outlasted the launch. The Revenue sacked EDS as its IT supplier in December 2003 — awarding the work to CapGemini, Fujitsu and BT — and threatened to sue over the failed tax credit system; EDS answered that the overpayments were the policy's fault, not the implementation's. The eventual settlement had EDS refund £70m, but the PAC noted £26.5m of it would not be paid unless EDS won further government contracts — a remedy Leigh called 'an invidious position'.

£2.2bn overpaid in 2003-04 and again in 2004-05; about £1bn never recovered; EDS refunded £70m, with £26.5m of it contingent on winning new government contracts.

The award design paid a year ahead on previous-year income; whenever incomes rose mid-year, the system overpaid and then pursued the poorest families for repayment.

The EDS-built system 'did not work as intended' at launch, and the Revenue had no reliable measurement of claimant error until long after go-live — the NAO qualified its opinion two years running.

Replacing EDS as IT supplier in December 2003, mid-disaster, split responsibility between an outgoing contractor and a department still changing its own rules.

EDS argued the overpayments came from the policy and the Revenue's changing requirements, not the implementation — and the PAC's design verdict backed it up.

The political timetable fixed the April 2003 launch; the systems and the error controls were not ready to carry it.

Paying a benefit in real time on last year's income bakes overpayments into the design. If the policy and the system both assume stability in an unstable world, no contractor can code it away.

The rebranded HM Revenue & Customs kept paying the credits and kept overpaying them. Gordon Brown's 2005 pre-Budget report raised the income disregard from £2,500 to £25,000, which HMRC said would cut future overpayments by about a third — but did nothing for the back-claims already being chased. The PAC kept pressing on the EDS settlement's probity, since a fifth of the refund hinged on the contractor winning more government work, and organised criminals were found to have attacked the system directly. The episode became the standing caution behind every later UK benefit-IT redesign.