The Inland Revenue's shambolic EDS-run tax credits system will not be fully back on track until March 2005, according to the National Audit Office (NAO).

The tax credits system was launched in April, but glitches and slow-running systems caused massive backlogs. The problems affected the system's stability, speed and availability, according to the NAO report on the Revenue's accounts.

Discussions are also underway about compensation for its unsatisfactory performance, including the possibility of legal action by the Revenue against EDS.

'The department considers that it will have recovered much of the lost ground by March 2004 but will not be fully back on track until the end of 2004-05,' says the NAO.

'The level of the problems caused as the systems went live demonstrated that there were undetected gaps in the design of the testing regime.'

In a joint statement issued to the NAO, the Revenue and EDS said: 'The nature of the particular testing regime meant that the underlying technical faults could not have been discovered and corrected in testing although more testing might have reduced the effects.

'The department and EDS are considering what lessons can be learned about technical system design and testing strategy, including the effects of a compressed testing timetable.'

Once the question of compensation is settled, the NAO will revisit the issue, is says.

The report also notes the relevance of EDS' bid for the Revenue's £4bn Aspire IT service provision deal, due to be announced by the end of the year.