Supplier EDS is to pay the government £71.25m in compensation for problems with the tax credits systems launched in 2003.

When the system went live it was so slow-running there were massive backlogs of applications, and miscalculations saw £1.9bn of overpayments in the first year alone. This week's settlement concludes years of wrangling over where the blame lies.

HM Revenue & Customs (HMRC), the department responsible for the system, says the figure is commensurate with EDS' responsibility for the problems.

HMRC chairman David Varney said: 'The tax credits IT problems had an adverse impact on many tax credits claimants.

'We were determined to reach a fair settlement for the taxpayer, and I believe that has now been achieved.'

The £71.25m is an aggregate figure and will include both an up-front settlement and payments of additional amounts over time.

A spokesman for EDS said: 'We believe the settlement is in our best interests. We are content with the settlement and are pleased to have avoided the cost and uncertainty of a legal case.

'The government remains an important client for EDS and we are pleased to have this dispute resolved,' he said.

The settlement will not affect the company's existing financial guidance, he said.

Eric Woods, government practice director at analyst Ovum, said: 'It was always a question of finding the right compromise.

'This has been a critical issue and therefore there had to be some substantial conclusion, but in the long term this is not a huge amount of money for either the government or EDS.

'The government has been quite 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.

In a report published in September, Public Accounts Committee chairman Edward Leigh said: 'The introduction and operation of the Inland Revenue’s new tax credits system have been a nightmare.'