Supplier EDS’s agreement to pay compensation to the government for the tax credits debacle was made with an eye on future business, rather than as an admission of culpability, according to experts.

After years of wrangling, it was announced last week that EDS will pay £71.25m in compensation to HM Revenue & Customs (HMRC), the department now running the scheme, for the chaos when the system was introduced in 2003.

Slow-running software caused massive backlogs of applications, and miscalculations resulted in overpayments totalling £1.9bn in the first year.

The difficulties of recouping the money are still unresolved and the Parliamentary Ombudsman has called for the losses to be written off.

The dispute over whether EDS or the government is to blame for the problems has been rumbling ever since the scheme began, and as recently as last month HMRC was threatening legal action.

The accepted wisdom is that tax credits is a classic example of public sector IT programmes de-railed by political targets.

The date for the introduction of the credits scheme had already been announced by the Chancellor in the House of Commons by the time discussions started with EDS about the technology to administrate the plan. And to meet Gordon Brown’s deadline, the testing time was cut from the development phase.

Although EDS’s payment to HMRC appears to be an admission of fault, analysts say the deal is one of expediency.

‘The settlement is a pragmatic move for EDS,’ says Mike Davis, senior research analyst at Butler Group.

EDS has stressed that the agreement – which includes an upfront settlement and a series of payments over time – will not affect the company’s financial guidance for this quarter or the coming year.

In the context of the value of the company’s government business, £71m is negligible, says Butler Group’s Davis.

‘The government wants to show it can inflict pain on IT suppliers and EDS wants to stay in the game for the future. In that context the actual amount is no money at all,’ he said.

Despite bold words on both sides, it was important to avoid a legal battle, says Eric Woods, government practice director at analyst Ovum.

‘Settlement outside the courts was always preferable, it was a question of finding the right compromise,’ he said. ‘It is always difficult to apportion blame in any rational manner, but EDS was willing to make this move.’

The government has been keen to emphasise its tougher management of IT suppliers in the wake of criticism over rising costs for disastrous projects, such as the Libra magistrates’ courts scheme.

The robust approach is exemplified by NHS IT director general Richard Granger, who famously said he would hold suppliers’ feet to the fire until the smell of burning flesh was overpowering. But the health service IT programme has also suffered at the hands of its political masters.

Granger recently sidestepped criticisms of the electronic bookings system by blaming a series of policy changes made after the technology project was well under way.

HMRC’s determination to hold EDS to account for tax credits should be seen against this background, says Woods.

‘The government has been keen to make a mark on this issue and it should be read as part of the stronger supplier management message gaining ground across the public sector,’ he said.

Nick Kalisperas, government director at supplier body Intellect, said: ‘We are pleased that the issue did not go to court because it is important for projects that issues be resolved effectively and companies are able to talk through their concerns.’