A U.K. government agency has threatened Electronic Data Systems Corp. with legal action to recoup some of the monies lost as a result of a troubled tax credit management software system.

Her Majesty"s Revenue & Customs (HMRC) department is threatening a lawsuit to recover part of an estimated US$3.5 billion in overpayments to taxpayers that were caused in part by technical glitches in a credit system designed and implemented by EDS under a contract with the agency.

The system was built to guarantee that accurate credits were awarded to families with children or below certain income levels.

The HMRC declined to disclose EDS"s specific role in building or supporting the system, or the amount it would seek to recover, citing the pending litigation.

Most of the overpayments were the result of human errors, according to the agency. The remaining overpayments, which the agency is seeking to recover from EDS, were the result of technical glitches. The amount of those overpayments was not disclosed.

The agency has said that so far, about US$90 million has been deemed unrecoverable.

Plano, Texas-based EDS implemented the system, but after its support contract expired in June 2004, EDS rival CapGemini was hired by HMRC to take over.

"HMRC now has a new IT partner, the system is working well, and discussions are ongoing with EDS about compensation for past failures," said a statement issued by the agency. "Court proceedings will begin if and when those discussions do not satisfactorily resolve the dispute."

Citing potential litigation, HMRC representatives declined to go into the specifics of the system or the technical problems involved.

A July 2003 House of Commons Treasury Committee report, however, said the EDS-built credit processing system suffered performance problems as it took feeds from other systems. Additionally, the committee report said that the IT staff found response times to be inordinately slow, causing the system to be brought down several times a day.

A U.K.-based EDS spokesman declined to comment on any specifics of the situation. "These discussions continue, and we"re putting our best resources on them with the aim of making sure we get to the point where there is an agreement that"s mutually acceptable around the tax credits issue," he said.

Reputation at stake

EDS"s reputation could be harmed if the agency proceeds with the lawsuit, said John O"Brien, an analyst at London-based research firm Ovum Ltd. In a note published on June 21, he said EDS has been rebuilding its reputation in the U.K. public sector since losing the tax agency"s contract to CapGemini last year.

The company got a big boost in rehabilitating its image in the U.K. when it won a $7.7 billion IT services revamp contract with the U.K. Ministry of Defence last March.

However, O"Brien noted that "this ghost of EDS"s past just won"t go away" and the company must be careful about how it handles the situation.